Social Inflation: Why Is It A Difficult-To-Measure Phenomenon?

Credit: Mike Cho/Unsplash

The American P&I Club’s managers, Shipowners Claims Bureau, Inc., and Daniel A. Tadros, Chief Operating Officer and Chief Legal and Compliance Officer, respectively, discuss the significance of the shipping industry has a deeper knowledge of the root causes of an intangible phenomenon, as reported by Safety4Sea.

Social inflation

The term “social inflation” has gained popularity in the insurance sector as a way to explain the rising costs of insurance claims, particularly those involving personal injuries. “Social inflation” is a comprehensive term that refers to “all ways in which insurers’ claims costs rise above and beyond regular economic inflation.” According to studies, “social inflation” refers to judicial and legislative developments that have an impact on insurers’ legal obligations and claim expenses. The word is used as a catch-all and refers to everything from the influence of social media, and cultural upheavals including politics, legal precedents, public opinion, and victimhood, to scientific and technological advances as they relate to medical care.

The rising cost and potential causes are highlighted in several conferences, panel debates, and publications. Over $1 million in jury or settlement awards, which were once uncommon, are now commonplace. Insurance companies are more likely to entertain higher settlement amounts, leading to higher settlement floors, if they are more concerned about huge, uncertain jury awards and rising litigation costs. As more of these cases reach inflated settlement prices, plaintiffs’ attorneys will continue to push the envelope and raise the settlement floor.

The escalating prospect of class lawsuits and the expanding power of litigation funders in the UK and EU demonstrates the seriousness with which social inflation should be handled.

The Statistics

Despite having less tonnage than the majority of the other International Group P&I Clubs, the American Club’s position in the US market offers a representative sample whose size will probably reflect that of other Clubs and marine insurers. According to an analysis of the American Club’s data for the ten-year period of 2011–2021, the American Club reported 5,069 personal injury cases worldwide (including the US), with an average incident cost of $40,494.30. US claims account for about 20% of all claims for the same time period and overall in the world. Over these ten years, the average cost per claim (CPC) for US claims has been $72,970.05, which is over 80% greater than the global average.

The cost per claim average in the US was $45,757.57 in 2011, compared to $36,047.38 globally (a difference of 26.85%). By 2018, the average CPC in the US had increased to $124,025.18, whereas it had increased to $54,779.10 globally (a difference of 126.41%). According to data from the US Labor Department, the annual rate of inflation from 2011 to 2018 is 11.6%. Using the “Inflation Calculator” from the Labor Department, the typical US CPC of $45,757.57 would be worth $51,080.72 in 2018. The real CPC for US claims in 2018 is $124,025.18, which is a 143% increase over the inflation rate for the same time period. How does the 143% CPC rise compare to other countries’ personal injury claims? The average CPC in 2011 was $36,047.38, and with the same 11.6% cumulative inflation rate in 2018, it would be worth $40,240.91 in 2018. $54,779.10 is the real CPC for global claims. This is a 51% increase over the overall inflation rate.

The Beginnings

The evidence is in favour of the premise that rising personal injury claim values are not primarily due to inflation. What causes the growth, and why? In the United States, settlement conferences or mediation orders are necessary in the majority, if not all, of personal injury cases. Unfortunately, owners frequently feel pressured into making settlement payments that they may not have been required to make. The hypothesis regarding the mindset of the jury pool is supported by social influences on claim value. How can an Owner (and subsequently the insurers) trust the judicial system in these circumstances, with mediations and settlement conferences occurring across the US in both federal and state courts? What safeguarding measures may and ought an Owner/Employer to take?

Possible Solutions

While there aren’t any easy or conclusive solutions to social inflation, owners and the industry can advocate for some proactive measures that hold true everywhere. Owners and employers must keep up their diligence and consideration for their safety practices. Accidents are inevitable. Owners must react with kindness, openness, and genuineness. Most essential, they must include their staff as soon as possible and frequently following any accident or injury. Our experience backs up the idea that a company’s culture and its ability to show empathy will influence or control a worker’s inclination to seek legal advice and exact “revenge” after suffering an injury. Agreements for post-injury arbitration have also had some success in reducing the owner’s exposure and avoiding the possible effects of societal inflation. It is advisable to look for and choose defence attorneys who are ready to counter the claimant’s attorney’s techniques and methods.

Early on in the discovery process, defence counsel must acknowledge the new reality and offer frank and objective assessments. Cases must be litigated in favourable jurisdictions with the right facts. The insurance industry and owners/operators must oppose the plaintiff’s counsel’s quick-changing methods and not be afraid to use analogous strategies and litigate cases. Owners and insurers can benefit from the proliferation of jury consultants and simulated trials, and their abilities must be utilised.

Higher-risk cases should be identified and, if at all feasible resolved early to avoid litigation (due to injuries, location, counsel, etc.). The sector needs to keep advocating change and educating the populace, prospective jurors, state and federal politicians, and the judicial system.

Overall, the remarkable economic inflation experienced over the previous year has an impact on all types of claims; as everyone’s quality of life increases, so do claimants’ losses. The shipping sector as a whole must be aware of this immeasurable phenomenon when social inflation is factored in.


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Source: Safety4Sea