Social inflation is a well-documented concern of the insurance industry and has become an increasing issue for the public in recent years. Generally, social inflation refers to the impact of rising loss costs on insurers’ claim payouts, claim expenses, loss ratios, and, ultimately, how much policyholders pay for insurance.
To highlight the prevalence of social inflation, one only needs to look at claim losses over time compared to the growth in general economic inflation. For example, according to the Swiss Re Institute, US liability claims costs have risen by an annual average of 16 percent over the last five years, well above average rates of economic inflation at around four percent, with general liability claims increasing by 15 percent in 2022 alone. And the effects of social inflation are wide-sweeping.
The future of litigation and the impact that social inflation will continue to have is uncertain. However, it is clear social inflation and its impact on the economy will get worse if left unchecked.
According to a recent Insurance Information Institute
Triple-I Issues Brief, "More frequent suits and bigger awards can lead to increased insurance costs as rates are adjusted to reflect the changing risk profile – or even to insurers ceasing to write particular forms of coverage. Higher premiums tend to be passed along to consumers in the form of higher prices and, in extreme cases, can ripple through the entire economy.”
To combat social inflation, the defense bar, insurers, and businesses are advocating for state legislatures to enact tort reform to create a more level playing field. These groups are also collaborating to improve preventative measures, counter corporate mistrust, and develop litigation strategies to defend against socially inflated jury verdicts.
While opinions vary as to the drivers of social inflation, it is evident social inflation is a pressing issue that requires swift solutions, in addition to the actions being taken to halt the rapid rise of lawsuits.
This is where tech, such as Artificial Intelligence (AI) and litigation management tools come into play. AI has been available in one form or another for decades, and there is no limit to the litigation management tools that are available in the market. So, the question is not if but rather
how technology can be leveraged to support litigation strategies.
The amount of historical data garnered around litigation, particularly when litigation management tools are employed, is immense. With the support of AI, data-driven insights can quickly be collected to better control the impact of social inflation.
For example, harnessing the power of AI to quickly mine relevant information earlier provides a competitive advantage that can lead to better-informed decisions on how and when to engage counsel, thereby reducing litigation costs. Further, the increased efficiencies from technology open the door for enhanced collaboration and thought leadership from legal teams. Once they are removed from redundant tasks, these legal experts become free to focus on litigation strategies and provide efficient legal expertise.
The future of litigation and the impact that social inflation will continue to have is uncertain. However, it is clear social inflation and its impact on the economy will get worse if left unchecked. Also unknown is the full extent to which AI and litigation management tools will continue to reshape litigation. Still, technology can and will leave its mark on the litigation landscape, arguably completely changing how defense dollars are spent while also serving as an agile tool to aid in the defense against social inflation.
