‘Unsustainable’ US social inflation spreading to other countries: Swiss Re

Social inflation has driven up US liability claims by 57% over the past decade, with the trend likely to spread to Europe, according to Swiss Re Institute.

Publishing its new Social Inflation Index, Swiss Re said social inflation increased liability claims in the US by a peak of 7% in 2023, on the back of a rising number of large court verdicts.

“The current rate of increase is unsustainable,” the reinsurer said.

Swiss Re warned there are signs that social inflation is also having an impact in the UK, Australia and Canada. Its Index reveals that social inflation added more than ten percentage points to liability claims in the UK in 2022 – running above the US – and about 7% in both Australia and Canada.

While social inflation has not been meaningful in continental Europe, Swiss Re warned that new legislation in the EU, in particular product liability and representative actions directives, could open the door to more mass tort claims.

“In Europe, a broadening scope of product liability risks and expansion of collective redress will be the main drivers pushing social inflation higher,” Swiss Re said. It predicts that the Netherlands is likely to be most exposed because of an established third-party litigation funding market and class action system.

Jérôme Jean Haegeli, global chief economist at Swiss Re, said there are no signs of social inflation easing, leaving policyholders facing higher rates for cover in a riskier environment.

“Litigation costs are rising and are now the key driver of liability claims. With businesses around the world facing rising legal defence costs, the cost of providing liability insurance has surged, particularly in the US, with the burden borne by consumers,” he said.

US commercial casualty insurance losses totalled $143bn last year, outpacing insured losses from global nat cats at $108bn, Swiss Re noted. Last year, the US saw 27 court cases awarding compensation of more than $100m each.

“Based on current trends, the impact of claims growth could offset some of the industry’s earnings benefits in casualty insurance resulting from higher interest rates in one to two years,” Swiss Re explained.

Gianfranco Lot, chief underwriting officer at Swiss Re’s P&C unit, added: “Over the past five years, US liability lines exposed to bodily injury claims recorded cumulative underwriting losses of $4bn. In response, capacity available to global businesses has significantly declined, while rate increases have not kept pace with loss trends.”

Swiss Re called for changes in the legal system to address social inflation. It wants to reform tort law to limit the scope of non-economic damages. It also called on insurers to invest in risk assessment and modelling, defensive tactics and better claims management.

“Leveraging new technologies and improved data analyses will also help in preparing for the future claims environment,” it said.