Social inflation has been on the rise in the US, while the UK and Europe have seen lesser impact. But could this soon change - and how can property casualty insurers protect themselves from this emerging risk?
US cultural exports to Europe tend to receive a mixed response. Whether le hamburger, American football, or milky coffee in paper cups, all have their fans and detractors.
Social inflation is, however, more uniformly disliked – for good reason. Swiss Re research shows it hit a 20-year high of 7% in the US in 2023, pushing US commercial casualty losses to $143 billion, a third more than total insured catastrophe losses globally. European casualty underwriters are now wondering, could this negative and destructive claims driver afflict Europe too?
The simple answer is, it’s complicated.
On the one hand, Europe is insulated from the mammoth jury awards granted in the US – Swiss Re counted 27 above $100 million in 2023 – by the fact that civil cases aren’t determined by juries. In the US, by contrast, the Great Resignation, as well as swelling ranks of highly visible – and highly compensated – reality-TV stars, and most recently, the cost-of-living crisis, have helped create a climate where the plaintiffs’ bar can successfully play on jurors’ anti-corporate sentiment and outrage about glaring economic inequalities.
Other structural features that protect us in Europe are the “loser-pays” principle around legal costs, more generous state welfare systems and codified compensation schemes.
On the other hand, litigation funding is growing rapidly here and remains largely unregulated. In the UK, its largest European market, the industry’s asset base grew more than ten-fold in the decade to 2021 to around £2.2 billion ($2.9 billion), according to law firm RPC. Although a Supreme Court ruling last year effectively nixed many third-party funding arrangements the government may yet legislate to reverse it. Third-party litigation funders are, meanwhile, thriving in Germany and the Netherlands.
New legal tools for pursuing mass tort claims are another risk factor.
In the EU, the Representative Actions Directive, which from June 2023 obliged member states to introduce procedural mechanisms for collective actions, has already led to a rise in such litigation.
Regulation is also creating exposures. The GDPR data privacy law offers well-worn collective redress possibilities. Others include the General Product Safety Directive. In the pipeline, the Product Liability and AI Liability Directives, along with regulation linked to sustainability and so-called greenwashing, could also increase social-inflationary pressures.
So the risk landscape is changing, However, it’s important to recognise the progress many primary casualty insurers have made on re-underwriting. It’s true that in the past some have engaged in cash-flow underwriting to take advantage of a period of high interest rates. But others have got on top of their long-term risk exposures and changed their portfolio mix.
At QBE Re we’re excited about opportunities in casualty and have expanded our book strategically in recent years. However, we’re clear-eyed about the risks and want to work with long-term partners whose underwriting discipline aligns with our own. We look to work with partners that have a diverse portfolio and a track record of managing the cycle successfully.
As capricious as casualty can be, data insights into what may be coming down the line are also improving, and we look to work with primary insurance partners which have the expertise to leverage them.
But we’re never complacent. For all the exposures we as an industry feel we have a handle on, it’s vital to keep pace with emerging risks, whether it’s those associated with new technologies, experimental medical treatments or rising insolvencies.
At QBE Re we are focused on how our partners are managing rate, limits, retentions, and attachment points. We keep a close eye on frequency of losses and implement exclusions where necessary. Cedant selection is one of our prime means of managing casualty risk. Our relationships make us confident about maintaining a sustainably profitable reinsurance portfolio through the cycle.
