IS IT AN EMERGING PHENOMENON?
I have been studying about the cost drivers for insurers, mainly focusing on claims issues. During this study, I encountered the term 'social inflation,' which is an emerging phenomenon to me. I was surprised to learn that it is a significant topic of discussion among insurers in America, Europe and even South Africa to mention a few. Social inflation is definitely an issue that is getting far less attention than it deserves. Muzi Dladla through the Insurance Institute of Gauteng news, agreed that it is not a new concept in South Africa and in the insurance world.
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Social Inflation
The key challenge about social inflation is getting to grips with what it actually means. There are two areas that make it difficult: namely definition and measurement
It is important to note that social inflation is not universally agreed upon, some believe that it simply does not exist.There is a belief that it is an agenda by the greedy insurance industry to raise rates to increase their earnings.
This focuses on the legal landscape, such as litigation, major jury awards, nuclear verdicts, courts or shifts in legal practices and liability standards.
Larry Crotser, Regional Head of Key Case Management, North America, at AGCS said the US has developed a culture of fault which can be?exceedingly dangerous to businesses!
This includes any ways in which insurance claims cost rises materially above what we call economic inflation (Not just the litigated claims). Definitely the risks are unexpected and unforeseen, leading to increased claim costs which are mainly influenced by non economic factors. The economic factors include supply chain constraints, the Consumer Price Index (CPI), exchange rate flactuations and catastrophic injury costs to mention a few. In contrast, the non-economic factors relate to societal approaches, perceptions, views or attitudes regarding accountability, blame or liability.
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2. Measurement
There is no common and consistent reference basket as there is with economic inflation. Claims vary significantly depending on specific circumstances making measurement challenging and somewhat elusive. Social inflation is driven by a range of socioeconomic factors (public perception and cultural attitudes) as well as legislative and litigation trends. This complexity makes it difficult to measure and plan for, leading to inadequate reserving and an increased risk of insolvency. In the past, the main cause of insolvency was under reserving.
Origin
According to Jerry Theodorou (2021), the term was brought to light by Warren Buffett in his letter to the shareholders of Berkshire Hathaway in 1977. He defined it as a definition by society and juries of what is covered by insurance policies. PartnerRe went on to expanded on Buffett’s description, adding aspects like new concepts of tort and negligence, legislated rises in compensation benefit levels.
In 2022, Insurance Information Institute and the Casualty Actuarial Society did a study and discovered that social inflation accounted for US$20 billion in commercial auto liability claims between 2010 and 2019 and a lot also on personal lines.
Litigation cases have been on the rise and the insurance market has been heavily affected due to the redefining or broadening of liability policy responses. This has the following effects:
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Below are the main drivers in some first world countries for social Inflation
1. Litigation funding
In Zimbabwe, the concept of litigation financing is still not popular and not usually practical.
2. Growing Awards from sympathetic juries/Nuclear verdicts
Zimbabwe’s legal system is based on a mixture of Roman-Dutch and English common law. Trials are generally conducted before judges or magistrates, who decide both questions of fact and law
3. Rollback of state tort reforms
4. Negative Public Sentiment and Corporate Accountability
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Does Social inflation exist in Zimbabwe?
While Zimbabwe may experience some elements of these factors, the term "social inflation" itself is more commonly used in the context of insurance markets in countries with jury-based legal systems and specific socio-economic dynamics. The term social inflation may not be directly applicable in the same way it is used in jurisdictions with different legal and economic frameworks. Instead, Zimbabwe would address similar issues within its own legal and regulatory context.
However, in as much as litigation culture was born in the US, there is plenty of evidence to show underlying drivers of social inflation are spreading worldwide. Jad Ariss, the Managing Director of The Geneva Association said, “Insurers need to accurately model the risks they underwrite and price them accordingly. Otherwise, unexpected claims payments can seriously damage insurers’ balance sheets and challenge their capacity to provide vital support to society. Social inflation linked to liability risks, gone unchecked, poses such a threat. Social inflation is no longer plaguing only the United States but starting to spread to other jurisdictions around the world. The number of liability claims pursued through litigation is increasing along with the compensation awarded to plaintiffs.”
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Below are similar like drivers in Zimbabwe:????????????????????
This refer to inflated claims or damages that are exaggerated beyond the actual losses incurred
a.??? General insurance cases
To mention a few**
b.??? Health Insurance
In 2022, an estimated US$1.48M was recovered from medical aid fraudsters following the adoption of anti-fraud interventions by the Association of Healthy Funders of Zimbabwe (AFHoZ) as part of efforts to enhance transparency and accountability in the sector.
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2. LEGISLATIVE AND JUDICIAL DEVELOPMENTS
Compensation for Loss of Pre-2009 Value of Pension Benefits Regulations, 2023, which were gazetted on Friday 29 September 2023 through Statutory Instrument 162 of 2023.
“The Justice George Smith-led Commission of Inquiry found that some policyholders and pension scheme members were prejudiced during the conversion process. The Inquiry’s Report recommended that the affected policyholders and pension scheme members should be compensated. Persistent social inflation that goes unrecognised can lead to chronic under-reserving and under-pricing.” IPEC 2023.
This mirrors the USA localised reversals in tort reform , where closed cases can be revisited with new regulations leading to revised compensation. This initiative by the Zimbabwean government aims to restore confidence in the insurance industry and the Insurance & Pensions Commission ZIM is effectively implementing this initiative.
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Changes in laws and regulations can lead to increased compliance costs for businesses, including insurance companies.
In Zimbabwe, the government proposed to take over the Third party and form a Road Accident Fund which has a wide broaden scope of cover.
?Below was the proposal by the Minister of finance on his 2024 Budget presentation:
“I, therefore, propose to broaden the scope of third-party insurance cover under the Third-Party Motor Vehicle Scheme to include the following:
·???????? Medical benefits;
·???????? Rehabilitation;
·???????? Injury grants;
·???????? Funeral grants and Loss of income
The proposed broadening of third-party insurance cover represents a significant step forward in protecting individuals affected by motor vehicle accidents beyond liability coverage. It also sets a precedent for further enhancements in comprehensive coverage, encouraging insurers to adopt a more holistic protection approach. While this may lead to an increase in claims costs, the effect on premiums may be minimal, given that the Zimbabwean market for personal lines is largely price-sensitive. (My opinion)
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3. LITIGATION CULTURE
Zimbabwe traditionally is not known for a litigious culture, with historically lower to zero incidence of large liability verdicts or claims. However, there has been a noticeable shift in recent times as more people in Zimbabwe increasingly embracing litigation as a means to address grievances or seek compensation (e.g. divorce cases on financial issues). This cultural change suggests a growing propensity towards legal recourse and could potentially impact various aspects of the legal and insurance landscape in the country. Whether this is a good thing or not, I will not comment!
?4. DISTRUST OF CORPORATE ENTITIES
As communities become more aware and assertive of their rights, the legal landscape evolves, leading to greater accountability and changes in corporate behaviour. This awareness has led to cooperates redefining their purpose as per below:
In Zimbabwe, distrust of corporate entities is increasingly apparent, particularly in cases involving issues like mining pollution and the food industry (though these are illustrative examples, similar concerns extend to various sectors). It is crucial for insurers to closely examine areas of exposure particularly those where their coverage might be implicated so as to effectively manage risks associated with these societal and environmental challenges (Emerging Risk).
Imagine you are insuring a mining company that is polluting rivers serving as vital water sources for several rural communities. The pollution, which includes harmful chemicals and heavy metals, may lead to cancer cases, thus affecting both health insurance (cancer etc.) and general insurance companies (Environmental Liability Insurance).
5. SOCIAL JUSTICE AND THE IMPACT OF SOCIAL MEDIA
Social media platforms like Facebook, Twitter, WhatsApp, and Instagram have become powerful tools for communication and activism. In Southern Africa, one of the most recent cases of social inflation caused by social media is the Old Mutual Molefi pension fund.?
Social media is a major cost factor due to ex gratia payments as companies may choose to make such payments to avoid tarnishing their reputations (My Opinion).
? #ImpactofSocialMedia
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EMERGING RISK
COVID-19
COVID-19 had an impact on social inflation primarily through its influence on legal and mostly societal factors that drove insurance claim costs. In many countries, the pandemic led to various disputes and lawsuits particularly around business interruption claims and health-related issues. Robert Mazzuoli in the Insurance Journal noted that insurers booked over US$20 billion of pandemic related claims in the first half of 2020, mainly from event-cancellation and business-interruption policies. In Zimbabwe, specialty lines such as travel have been affected, but not to a significant extent than the medical Aid industry. Most, if not all, travel policies in Zimbabwe are heavily internationally reinsured; hence, the terms of the policies were mainly decided by the legal frameworks of the re/insurers' countries during the pandemic period.
Climate Change
Is it about climate liability or the liability climate?
Emergence of Mass Torts in the insurance industry
Policies affected by Mass Torts
Social inflation affect
It is important to note that, in as much as insurance companies have primary policy limits, Social inflation significantly impacts the exhaustion of primary policy limits by increasing the frequency and severity of claims. This will also lead to claims going into umbrella liability policies. In most fleet motor insurance policies, liability costs are very active and the danger is that third-party limits are very high, sometimes up to USD 40,000. Additionally, there is an umbrella liability of over USD 100,000, which can be easily abused.
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I once had a discussion with a friend who had a client with a fleet of vehicles. The driver conspired with a third party to stage an accident so that the third party could buy a new car, as the old car had problems that he could not financially meet. (That is how bad the society has become). One can also analyse this case from the point of view that a third party who has a legal right to claim from an insured can opt for three expensive quotes, fully understanding that the third party limit of comprehensive coverage will cover all the costs.
Reserving for non economic events like these is not easy, but as insurers, we may apply the following measures:
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Proposed Solutions
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?Warning:
The advice provided in this article is of a general nature and does not take into account your specific needs and objectives.
SOURCE
5.????? Bloomberg Law, How litigation finance works: Making millions off of other people’s lawsuits, 2021
9.????? Cornerstone Research, Securities Class Action Settlements – 2020 Review And Analysis, March 18, 2021
10.? AGCS, Collective actions and litigation funding and the impact on securities claims: A global snapshot, July 2020
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Dad | Executive | Researcher | FIISA | MBA | DBA Candidate | Risk & Climate Enthusiast | Nominated Thought Leader
7 个月Hi Paul, great synthesis of insights on the subject. Are you doing a formal study on the subject? I’m interested in understanding SI impact on other variables. i.e the relationship between the rise in social inflation (perceived as you suggested) and (the deteriorating social wellbeing and/or deteriorating economical wellbeing). Context Delimited to SA. Depending on availability of literature. Im happy to chat privately, if you wish.