Social Inflation Q&A with Taylor Smith of Suite 200 Solutions
A Guide to Social Inflation
These days, it’s nearly impossible to discuss claims litigation without the topic of social inflation rising to the forefront. It’s a topic we’ve written about extensively on the CaseGlide blog, touching on social inflation and early intervention as well as the exceptionally high jury awards often caused by social inflation known as nuclear verdicts.
We recently covered social inflation on the Litigation Management Podcast, the industry’s first and only podcast dedicated solely to claims litigation management, tapping Taylor Smith of Suite 200 Solutions for his insights into the impact social inflation can have on claims litigation management.
Below are select excerpts of the conversation between Taylor Smith and CaseGlide CEO Wesley Todd regarding social inflation.
A Guide to Social Inflation: Defining the Drivers and Mitigating the Risks
Wesley Todd: I want to start it off with a real simple question—although it's what I would call a challenging answer. What is social inflation?
Taylor Smith: Now, that’s a good question. And it is actually a little bit of a challenging answer. It’s become a very important buzzword in the industry. I think everyone from a senior claim officer right down to a frontline adjuster is encountering the word. It’s being used in their organizations. It’s being written in the literature.
At a very high level, it is a term that has been around for a long time. In my own experience, I first began seeing it discussed with greater seriousness around 2015. I think it’s reached a feverish pitch right now, in terms of how frequently the term is used and discussed. It’s been around since the 1970s—many people know that Warren Buffett used it in a letter to his investors in 1977. However, the general definition of a paraphrase is that there are two components to it.
The first is that social inflation is used to describe pressures, societal pressures that are getting things covered under the insurance contract that weren’t intended to be covered in the first place. Today, it’s used to talk about runaway case values. Not just nuclear verdicts and jury awards, but the pressures of all these things driving up settlement values, compensation values, what was previously compensable at ‘x’ in today’s world, potentially compensable and why, and that creates uncertainty for underwriters. It creates challenges for claims organizations
“Social inflation is used to describe pressures, societal pressures that are getting things covered under the insurance contract that weren't intended to be covered...”
That’s one whole component—then the other is this concept of increased values. There are four reports mentioned that I would encourage anyone to read. The first is the report from the Insurance Research Council in 2020 on social inflation. The second is Sedgwick did a very interesting report about social inflation in 2020. That was done by Alison Daly and Chris Mandel. I think it’s very good because it serves as a compilation of industry literature. The third is a 2019 Milliman report on the general liability line, and it talks about deteriorating trends and increased case values, and I think that’s valuable. And then in 2018, the Casualty Actuarial Society put out a report. Those are the four that I think are particularly helpful for people that are new to the topic or want to know more about it.
Wesley: What is causing social inflation now? Why is it now in the news? Why is it something that everybody's bringing up in every call? What changed all of a sudden in these past few years that we're hearing about it all together now?
Taylor: Looking at those four reports, reading blogs and putting everything together, you see some common themes that are often repeated. If we’re going to talk about a list of drivers, I personally pegged it at 10 different things. We’ve alluded to some things in the definition itself. There have been changes in the appropriateness of filing lawsuits in the first place as people are more willing to do that. There have been changes in expectations about compensation. We all watch TV. Plaintiff firm ads now highlight people who stand up and say, ‘this is the amount of money I got,’ and we all put ourselves in their shoes. Clearly higher jury awards coming out of the back is also a driver of the whole concept, because people hear about it and incorporate that there are now more class action lawsuits than there were previously. Plaintiff attorneys are now better at incorporating allegations of severe injury, like traumatic brain injury. That’s another driver.
Sometimes mentioned in the Sedgwick report, but in others as well, is the fact that we now have 15% more lawyers in the United States per million population than we had in 2007. Fifteen percent doesn’t sound like a lot, but in fact, it’s hundreds of thousands of more lawyers now. That’s considered a driver too.
What I think interests me is that when you dig down, you really see changes in societal attitudes. For example, income inequality—six out of 10 Americans now believe that income inequality in our country is significant. You might think about this as a political issue or a societal issue, but it changes how people feel we should assign responsibility for making things better. It’s significant in our country, and six out of 10 Americans also believe that big corporations should play a very important role in fixing that. Those two things together change or create a societal change. You mix that together with a few Gallup Poll findings from 2019, and you can see how this snowballs a little bit. In 2019, Gallup found that anger levels among the people they polled were the highest they’ve been in more than a decade. What that means is, one out of five Americans is really angry during some part of their day.
There have been many studies that show when you’re really angry, you’re more likely to file a lawsuit. Gallup also found that big corporations have a low area of competence [in the minds of the people]. Now you’ve got a thing where you’ve got angry people, there’s wealth inequality that people genuinely feel exists, and they don’t like corporations. They feel corporations should bear some responsibility for fixing those things.
People, in general, in society feel more entitled. I will tell you that if you do studies on attorney advertising, obviously, it’s the highest it’s ever been. As soon as they were allowed to advertise, we were inundated with attorney advertisements, and that’s become very sophisticated. At the same time, the use of the internet allows for a much broader reach with those ads with that advertising. If you look at the highest paid keywords in Google search, you find frequent examples of things like ‘Los Angeles attorney,’ or ‘auto accident attorney.’ Those are paid for dearly, because they produce results to get people to reach out to their attorney.
I just read a very interesting article put together by Travelers that talked about how attorney tactics are changing as well. Some examples of that are the increased use of policy limit demands, venue shopping and better use of social media to find and vet the right jurors for jury trials. And then lastly, third party funding that is considered by many to be a watershed, because third party funding fundamentally changed incentives in the litigation management system as we knew it. Plaintiffs were always incented to some level to reach a reasonable resolution of the file/the case/the dispute in return for getting their money more quickly. Now, with third party funding there, it’s changed the economics of things. Plaintiff’s counsel has more money to work with, and the desire to resolve things more quickly may be diminished because there are third parties who have looked at the probability of what this case will produce and how likely it is to produce that result. That third party funding was described by The New York Times as a $10 billion industry. There’s a lot of money in third party funding of these lawsuits.
Wesley: I hear differing opinions on whether social inflation is a big deal. From your perspective, how bad is it now?
Taylor: I think most people will acknowledge that a lot of discussion about social inflation has been anecdotal. I think the industry is just now getting to the point that it’s beginning to look at data points. For a bunch of reasons, we can talk about how the industry is challenged in talking about data points because how what one organization calls this case type, another organization calls it something else. But on the other hand, the insurance industry is the law of large numbers, and there’s no question that costs are rising, and litigation and outcomes are worsening in litigation. Just about everybody agrees with that, and the Insurance Research Council’s report is illustrative of this.
The previous trends for loss ratios and commercial auto were going down in 2013, but they started to go up. Commercial auto, professional liability, product liability and DNR. What most people seem to feel is that with these four very specific lines of risk, the increased values there are just contributing to increased values and other lines of business, including personal auto, for example, which is now sort of felt to be experiencing pressures to drive this up.
Compensation and legal costs is about $429 billion a year, but less than 60% of that makes it to the injured party. Everything else is sucked off in costs, attorney’s fees and so forth. The biggest area of this spend is commercial and general liability. It’s about 58%, 37% in auto, 4% in medical malpractice. So those are three areas that you can sort of put together. Florida, as you will know, has the highest litigation costs as a percentage of GDP at 3.6%. If the national average is 2.3, Florida is at 3.6, so a big, big, big difference there. Florida, California, New York and New Jersey all have costs per household for litigation, compensation, legal costs in excess of $4,000. So those four states are at about $4,000 per household, while the national average or other states are at $2,000. That’s why when you’re talking with claims professionals, they talk about what they’re managing in terms of litigation in those four states.
I’m quick to say that there are good things that can happen. Florida is no longer listed on the official list of judicial hellholes, where it was for many years. There are other states now that have superseded it and that’s because of legislative reforms in the state of Florida, which have increased certainty. That doesn’t mean the problem has gone away, but it’s no longer listed on the official list of judicial hellholes, and that should give us all hope.
There’s more attorney involvement in cases than there has been previously. Big auto claims used to be 47% of claims nationally in 2002. In 2017, it was at 52%. That may not seem too big but think about this: The whole concept of personal injury protection (PIP) claims was designed as a no-fault system so that lawyers wouldn’t be required. That’s now at 39%. That’s almost four out of 10 claims where PIP claims have an attorney involved. In Florida, it’s 55%, so more than half—and that’s in a line of business designed to avoid attorney involvement entirely.
The 2008 median jury award for commercial vehicle fatalities was $1.5 million in 2008. In 2018, that increased 367% to $5.5 million. We mentioned nuclear verdicts, the common definition of a nuclear verdict is anything over $10 million. But in 2015, the largest verdict in the United States was $844 million. One year later, it was $8 billion. That is a case that got reduced to like $6.7 million or so. But the second largest verdict that year, a year later was $2 billion. Those kinds of numbers scare people, they scare claims people, they scare underwriters, they excite plaintiffs and contribute to settlement values overall.
Please note that the questions and answers you read here have been edited for both length and clarity. For the conversation in its entirety, we encourage you to listen to Ep9: A Guide to Social Inflation: Part 1 – Defining the Drivers and Ep10: A Guide to Social Inflation: Part 2 – How to Mitigate the Risk from the podcast.