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COVID having dramatic effects on the course of social inflation

Friday, February 12th, 2021

The experts agree: Social inflation hasn’t gone away during the pandemic. And in fact, things may be getting worse.

Ratings agency A.M. Best Co. just said it is maintaining its “negative” outlook for the U.S. commercial lines segment for 2021, and one of the reasons is social inflation.

The consensus seems more negative

You’ve read about social inflation here before.

The term refers to the rising costs of insurance claims that are a result of changes in society’s attitude toward business and toward what plaintiffs are entitled to when they sue business defendants. Several months ago, we checked to see how it was being affected by COVID-19 and its economic fallout. What we found was uncertain, with indicators pointing in opposite directions.

Now, the consensus seems more negative, in terms of the impact on the insurance industry and costs to the insured.

A.M. Best saw reason to hope for the economic effect of the coronavirus to lessen, with recent vaccine developments. But it was pessimistic as to the social inflation effect.

A Business Insurance article noted that the Best report said, “the re-emergence of social inflation as courts re-open, higher reinsurance rates and tighter terms and conditions, and rising loss costs are among the factors that will continue to adversely impact the segment.”

Things looked better for awhile

Ironically, Best was initially more optimistic earlier in the pandemic, noting that insurers got something of a break with courts closed or operating with limited capacity. Economic uncertainty “helped drive faster and lower settlements.” That effect is expected to go away in 2021.

The concern expressed by Best is backed up by Fitch Ratings, which recently put out a report titled, “Social Inflation Will Be Accelerated Further by Pandemic.”

“The pandemic will accelerate social inflation in commercial liability in 2021,” Fitch said in a release about the report. “In contrast to 2020, which was characterized by significant commercial property claims, 2021 will have a higher number of claims in commercial liability; many of which will be either directly or indirectly linked to the pandemic.”

Like Best, Fitch noted that the pandemic initially led to liability claims activity diminishing, but said “This effect will be temporary as the number of legal proceedings will increase again alongside the resumption of standard general economic activity.”

“The exact number of claims that the pandemic could cause in the liability business is uncertain, but it is likely that liability claims will be substantial,” the release continued.

‘Significant price increases’

In recent years, social inflation “has led to significant price increases in the industry,” Fitch said – and it expects price increases to continue in 2021.

As we’ve promised, South Risk will continue to monitor this and the many other trends that can affect you and your insurance. And remember as always, give the professional brokers at South Risk a call whenever you need help with risk management.