Litigation costs drive 57% increase in liability claims in US over past decade, Swiss Re Institute finds | 07.09.24

• Social inflation outpaces economic inflation, fueling growth in U.S. liability claims, peaking at 7% in 2023 for the first time in two decades
• Social inflation has emerged as the primary driver of rising US liability claims, leading to insurance losses, increased uncertainty and reduced insurance capacity for businesses around the world.
• Signs of social inflation hitting the UK, Australia and Canada as mass tort claims expand; trend likely to spread to EU countries given more accessible litigation funding and legislative reforms expanding product liability and collective redress

Zurich, September 7, 2024 – Social inflation has emerged as the main growth driver of U.S. liability claims, according to the Swiss Re Institute’s new Social Inflation Index. Driven by a growing number of major court rulings, social inflation has increased U.S. liability claims by 57% over the past decade, reaching an annual peak of 7% in 2023.

Social inflation is a phenomenon observed since the 1980s, in which insured liability claims increase faster than can be explained by economic factors such as wages or core consumer price inflation. It is driven by a range of socioeconomic, legislative, and litigation trends, such as an increased tendency to settle compensation claims in court, and is most pronounced in the U.S., where tort law is based on precedent and cases are decided by juries. In addition, third-party litigation funding (TPLF)—the process by which litigants and law firms can finance their lawsuits with the help of an outside investor—facilitates access to litigation, and the legal system permits the payment of large sums of compensation, particularly for personal injury claims. In 2023 alone, there were 27 lawsuits in which compensation awards of more than $100 million each were awarded.

Jérôme Jean Haegeli, Global Chief Economist, Swiss Re, said: “Unlike economic inflation, social inflation shows no sign of abating. Litigation costs are rising and are now the main driver of liability claims. As companies around the world face rising legal defence costs, the cost of providing liability insurance has soared, particularly in the US, with the burden being borne by consumers. Given these worrying developments, we are quantifying the cost drivers that are outpacing economic inflation with our new social inflation index.”

Higher claims costs not only create a riskier and more expensive environment for businesses, they’re also a concern for insurers. Over the past five years, U.S. commercial casualty losses have grown at an average annual rate of 11% to $143 billion in 2023 — a figure that far exceeds total insured losses from global natural catastrophes of $108 billion in the same year. Based on current trends, the impact of claims growth could offset some of the casualty industry’s profit gains from higher interest rates in one to two years.

Gianfranco Lot, Chief Underwriting Officer P&C Re at Swiss Re, said: “We are seeing a continued increase in aggressive litigation practices that are particularly problematic for liability lines. Over the past five years, U.S. liability lines exposed to bodily injury claims have recorded cumulative underwriting losses of USD 43 billion. In response, available capacity for global businesses has declined significantly, while rate increases have not kept pace with loss trends.”

While social inflation is primarily a US phenomenon, there are signs that it is also affecting other common law countries, such as the UK, Australia and Canada, where tort law is based on precedent. Based on Swiss Re’s index analysis, social inflation contributed more than 10% to liability claims in the UK in 2023. This increase is due to US spillover effects, reflected in claims filed by a company against its UK insurer following a large compensation award in a US lawsuit. Similarly, the effect in Australia and Canada was around 7% due to an expansion of mass tort claims. In contrast, tort law in continental Europe is governed by comprehensive civil codes and tort cases are decided by professional judges rather than juries. To date, social inflation has not been significant in countries such as France and Germany. However, mass tort claims could increase in the EU due to significant legislative changes to product liability and representative actions directives.

Tackling Social Inflation: A Joint Effort

An effective approach to social inflation could come from the legal system itself, through tort reform aimed at limiting the scope of non-economic damages. Transparency and regulation of TPLF would provide clarity and consistency in tightening disclosure requirements. At the same time, insurers should invest in risk assessment and modelling, defensive tactics and better claims management. Leveraging new technologies and improved data analytics will also help prepare for the future claims environment.

Social inflation index – methodology

To measure social inflation more accurately, the Swiss Re Institute created a ‘Social Inflation Index’. To do this, it subtracted real GDP growth, a proxy for exposure growth, and actuarial assumptions for claims frequency from claims growth to create a proxy for claims severity. For the economic inflation component of the social inflation equation, it selected the macroeconomic cost factors with the highest correlation to liability claim severity and calculated a weighted average of the claims variables that reflected the respective strength of correlation. All variables were analysed as three-year moving averages.

How to download this study

The Swiss Re Institute publication “Litigation costs driving claims inflation – indexing liability loss trends” is available here.