Morgan Stanley highlights the challenge of social inflation in insurance, to continue in 2024

Morgan Stanley‘s recent report highlights the ongoing challenge of social inflation in the insurance industry, expected to continue through 2024.

This trend, where insurers’ costs rise faster than general inflation due to increased litigation expenses, is being closely monitored.

The report analyzes civil court data from the past decade, noting a shift in the nature of court cases and their financial implications. Although new case numbers are relatively stable, there’s a significant rise in jury awards and settlement amounts.

This trend, coupled with high litigation costs, suggests that social inflation will remain a significant concern for insurers, particularly in states with lower case clearance rates like California.

Social inflation refers to the trend of insurers’ costs outpacing general inflation, primarily fueled by escalating litigation expenses.

Morgan Stanley’s analysis, based on the last decade of state-level civil court data, emphasises the increasing importance of newer court cases in understanding the impact of social inflation.

Morgan Stanley highlights the challenge of social inflation in insurance, to continue in 2024

Despite improvements in case clearance rates, the financial institution argues that the rising jury awards and settlement amounts, particularly in the post-COVID era, will continue to pose challenges for the industry.

While the number of new cases has seen manageable growth, the focus shifts towards the escalating settlement amounts and jury awards. These factors indicate a persistent and potentially worsening scenario for social inflation.

The number of incoming cases in 2022 grew by approximately 5% year-on-year, with preliminary data for 2023 showing a further 7% increase.

The number of cases remains below pre-COVID levels. The report anticipates this trend to persist into 2024.

Morgan Stanley highlights the challenge of social inflation in insurance, to continue in 2024

The report indicates a concerning trend in the legal landscape for insurers. Although there was a slight decrease in the average jury award amount in 2023 to around $57,000, it still remains significantly high, being only the second time since 2012 that awards have exceeded $50,000.

Settlement amounts also saw an increase, with an average of about $37,600 in total civil cases, marking a 3% rise from the previous year.

A notable 81% of these cases were settled, primarily because companies prefer to avoid the unpredictability of jury trials.

Morgan Stanley warns that these escalating litigation costs contribute to prolonged social inflation, necessitating a shift in focus towards newer court cases. This concern is particularly acute in states like California, where the case clearance rate was just 56% in 2022.

The phenomenon of social inflation has garnered a great deal of attention in the property and casualty P&C insurance industry. The term defies strict definition, though it is widely acknowledged to involve excessive growth in insurance settlements. Insurance Information Institute estimate that social inflation increased commercial auto liability claims by more than $20 billion. Evidence of a similar trend is also present in two other lines of business: other liability—occurrence and medical malpractice—claims made.

Because social inflation is ill defined, there is an element of subjectivity in quantifying its presence. Nevertheless, we found substantial evidence in industrywide loss triangles that three lines of business (commercial auto liability, other liability—occurrence, and medical malpractice—claims made) display characteristics consistent with what one would expect from most common discussions of social inflation—namely, that the inflation component of loss development factors has been rising.

Nataly Kramer   by Nataly Kramer