Covid familiarized the world with social distancing, but it also reminded insurers that they need to stay wary of social inflation. If insurers don’t make intelligent policy decisions, they can end up on the wrong side of increasingly large court judgments.

Warren Buffett first used the term “social inflation” to describe society’s changing insurance expectations — in effect, jury decisions had broadened the coverage requirements for policies, which inflated costs for insurers. The term returned to insurance discussions in 2010, and since then, a combination of legal and economic factors have kept the concept relevant. 

In the first half of 2021, Fitch Ratings noted that D&O insurers were posting underwriting losses, partly due to legal defense costs and increased awards to plaintiffs. Jury consultants have also cited post-pandemic tensions as a reason why larger awards are handed out more frequently to penalize insurers.

Even outside of the United States, social inflation is regarded as a silent assassin in the liability insurance world. The broader definitions of liability, combined with rising numbers of court cases and more sympathy for plaintiffs, have driven insurers to bear rising costs connected with their coverage decisions.

Insurers can’t control public sentiment, but they can control their own screening processes to judge risks more effectively. External data can help insurers consider a client’s past litigation history before they write new policies. 

External Data to Mitigate Social Inflation

The most analytically mature organizations use multiple data sources, which includes external data that offers insights into the risks involved with specific policy decisions. They offer a way to examine the court judgments associated with a business for a better understanding of a potential policy holder’s litigation strategy. 

A company with an established track record of bringing disputes to court may be more likely to file complaints against an insurer in the future. Identifying those clients in advance is a way to avoid the risk of expensive litigation.

Data products available on the Demyst platform can identify relevant court decisions to improve the accuracy of a new customer risk assessment. Instead of focusing on a single upstream data source, Demyst maximizes flexibility and efficiency with a catalog of external data providers integrated through a single API.