Current rate of US liability claims inflation unsustainable, says Swiss Re

Increases in US liability claims are being driven by still-elevated wages, a medium-term rise in medical inflation, and social inflation, with the latter having the longest-lasting effect, according to a new economic insight from the Swiss Re Institute, US liability claims: the shadow of social inflation still looms. The insight notes that US liability claims costs rose 16% on average for the last five years, far exceeding economic claims drivers, suggesting that social inflation “remains alive and kicking” in the US. Swiss Re says the US is in the middle of a wave of social inflation, which is likely to continue unabated, adding that economic disinflation will not provide much relief for liability claims costs, and nor will stronger investment returns. “With the macroeconomic environment now turning to one of disinflation, the social inflation story is set to come to the fore again, with liability insurers most exposed. Excluding reserves changes, US general liability claims were up 15% in 2022. This degree of claims severity, due mostly to social inflation factors, is unsustainable. Greater investment returns due to higher interest rates will not be enough to cover the high claims, and liability insurers will need to retain focus on underwriting discipline, says the reinsurer. It notes that with the current rotation from economic goods to services inflation, attention is shifting back to liability lines, where wages and health care expenditures are the key drivers for claims severity. The current wave of social inflation in the US is characterised by a rising frequency of large single-claimant events, often based on ballooning non-economic damages, says the insight. At the same time, the number of claimants in multi-district litigation cases has risen to a historic high. Swiss Re says the current outlook for social inflation is based on several interconnected factors: Changing jury attitudes with larger sums awarded in tort cases, especially for non-economic damages, driven by the belief that large corporations can afford substantial payouts and that the legal system should correct social injustices. The growing availability of third-party litigation funding allows plaintiffs to pursue better-funded cases for longer. Additional capital also leads to increases in legal advertising by plaintiff lawyers, further contributing to growth of mass torts. There is a growing sentiment that corporations should be held accountable for a wide range of issues, from environmental damage to product defects. Expanding legal concepts: with courts expanding liability in certain areas, making it easier for plaintiffs to sue, for example, public nuisance claims against manufacturers that have damaged public health. The Swiss Re insight concludes: “Based on current trends, the impact of social inflation outweighs the benefit of higher interest rates on long-tail lines’ investment income. Current claims growth is unsustainable, and further pressure points are ahead, with emerging litigation risks originating from factors such as per- and polyfluoroalkyl chemicals, obesity, climate change, algorithmic liability, addictive software design, etc. This could raise additional uncertainty for tort liability claims trends in the coming years.”

Current rate of US liability claims inflation unsustainable, says Swiss Re

US in the middle of wave of social inflation

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