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Social inflation describes the rapid increases in insurance costs over time. This is caused by several factors, including legal trends, industry behaviors, increased litigation, plaintiff-friendly judgements, higher jury awards, and a number of other contributing reasons.
Current Social Inflation Trends
Several trends have contributed to the growing cost of insurance premiums:
- General inflation
- New legal practices
- Changing interpretations of legal precedents
- Excessive awards damages
- Public sentiment towards corporations
- Demographic shifts
- New risks
In 2021, only 18% of Americans had confidence in big business. While 70% of consumers believed in small businesses, sentiment has eroded since the supply chain crisis began in 2020. At the same time, securities class actions have skyrockets, and juries are more likely to favor an individual plaintiff than a company, the defendant.
But what policies are most affected?
What is driving Social Inflation
Several specific issues contribute directly and indirectly to social inflation in the insurance industry:
- Ballooning punitive damages - As more verdicts increase amounts for punitive damages, or costs meant to punish the defendant.
- Public perception of payouts - Jurors tend to believe that large payouts are common, primarily due to big news stories and legal thrillers. As a result, a jury verdict is likely to award a higher sum to the plaintiff.
- Broad liabilities - The meaning of liability has expanded, with individuals believing someone always has to pay for damages.
- Increased litigation funding - Restrictions on third-party lawsuit financing for litigations have decreased. Since the plaintiff's attorney would typically receive a cut of the funds of the claim, this drives higher claim demands.
- Attorney advertising - Equipped with enhanced technology, analytics, and potential higher jury awards, attorneys are increasing their advertising costs and becoming more involved in litigation.
- Shifting state regulation - State-specific changes that favor the plaintiffs, such as tort rollbacks, reducing the time required to file a claim, and changing caps for punitive damages all contribute to rising claim costs.
- Trust or distrust of corporations - Public bias against corporations can push jurors to relate more to the plaintiff, even if the defendant is not at fault.
- Juror biases and emotional reasoning - Juries carefully selected by the plaintiff may result in, if not pro-plaintiff panels, but also in jurors who make legal decisions based on an emotional response rather than the facts of the case.
All of these influences result in three stressors for small businesses—additional claims, more severe claims, and higher premiums.
Strategies to Navigate Social Inflation
When claims make the headlines or attorneys are incentivized by potential jury rewards, more people are encouraged to file a lawsuit. And attorneys, eager to earn more, often demand the maximum payout your insurance will cover, and sometimes more.
More people filing claims, more often, for bigger rewards is driving up the cost of insurance. For small businesses, premium price increases are stretching already stressed budgets.
BUt what happens if you don’t have liability insurance at all?
Businesses without liability insurance protection must pay everything out of pocket—high lawsuit costs, plaintiff rewards, and other losses related to filed claims. While premium costs are rising, investing in insurance provides a safety net from potentially catastrophic claims costs.
Strategies to Navigate Social Inflation
The good news is that there are ways small businesses can keep insurance costs within budget. Reducing risk will be critical to limiting the affect of social inflation on your policies. Some action items you can use to better manage risk are:
- Regular risk assessmentsrisk assessments - A comprehensive and routine risk assessment for your organization can limit liability exposure and ensure you are investing in insurance that makes the most sense for your specific business.
- Invest in insurance - Ideally, you will never have to tap into your liability insurance. But as claims increase, you may have to deal with an expensive lawsuit. Without insurance, you are required to pay all of the legal and payout fees yourself. Investing in liability insurance can reduce your financial burden in the long run.
- Update employee materials regularly - Ensure that employees are aware of their role in maintaining compliance and best practices. This can translate into updating employment law compliance posters, the employee handbook, and other educational materials annually or semi-annually. You may want to tack on annual HR advisory services to ensure everything is up to code.
- Leverage expert opinion - Finally, it helps to have a professional who knows liability inside and out. Make sure you are working with a respected broker and legal experts who can help you to spot potential risks and provide guidance on how to address them.
This new surge of social inflation will have a ripple effect throughout the liability insurance market. Small businesses looking to optimize their coverage while remaining within budget should speak with their broker about their coverage and exposures. With large settlements becoming normal, you may also want to consider asking about excess liability insurance.
Of course, the best way to potentially mitigate expenses is to be proactive and reduce risks in your business operations. Businesses can discover potential risk areas in assessment. At Counterpart, we offer a complimentary risk assessment that evaluates small business liability exposure over 1,000 data points.
Counterpart offers modern D&O, EPLI, Excess and Fiduciary products. Through data mining and advanced analytics, the company’s rating systems measures risk more efficiently while requiring less information from the broker and applicant. Talk to an expert today to learn more.
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