Litigation costs drive US liability claims by 57% over past decade, reveals Swiss Re Institute

• Social Inflation exceeds economic inflation in driving growth of US liability claims, peaking at 7% in 2023 for first time in two decades
• Social inflation emerging as main driver behind rising US liability claims, leading to underwriting losses, heightened uncertainty and reduced insurance capacity for businesses across the world
• Signs of social inflation impacting the UK, Australia and Canada due to expansion of mass-tort claims; trend likely to spread to EU countries, given more accessible litigation funding and legal reforms broadening product liability and collective redress

Zurich, 7 September 2024 – Social inflation has become the main growth driver of US liability claims, according to Swiss Re Institute‘s new Social Inflation Index. Primarily due to a rising number of large court verdicts, social inflation increased liability claims in the US by 57% in the past decade and reached an annual peak of 7% in 2023.

Social inflation is a phenomenon observed since the 1980s, where insured liability claims increase faster than can be explained by economic factors, such as wages or core consumer price inflation. It is driven by a range of socioeconomic, legislative and litigation trends such as an increased tendency to settle compensation claims in court and is most pronounced in the US, where tort law is based on precedent and court cases are adjudicated by juries. In addition, third-party litigation funding (TPLF) – the process by which litigants and law firms can fund their litigation with the help of a third-party investor – facilitates access to trial, and the legal system allows for the payment of large sums of compensation, particularly for bodily injury claims. In 2023 alone, there were 27 court cases awarding compensation of more than USD 100 million each.

Jérôme Jean Haegeli, Swiss Re's Global Chief Economist, says: "Unlike economic inflation, there is no sign of social inflation abating. Litigation costs are rising and are now the key driver of liability claims. With businesses around the world facing rising legal defence costs, the cost of providing liability insurance has surged, particularly in the US, with the burden borne by consumers. Given these unsettling developments, we quantify the cost drivers in excess of economic inflation with our new social inflation index."

Increased claims costs not only create a riskier and more costly environment for businesses but are also a concern for insurers. Over the past five years, US commercial casualty insurance losses grew at an average annual rate of 11% to USD 143 billion in 2023 – a sum that by far surpasses the total insured losses from global natural catastrophes of USD 108 billion in the same year. Based on current trends, the impact of claims growth could offset some of the industry's earnings benefits in casualty insurance resulting from higher interest rates in one to two years.

Gianfranco Lot, Swiss Re's Chief Underwriting Officer P&C Re, says: "We observe continuous increases in aggressive litigation practices that are especially problematic for liability insurance. Over the past five years, US liability lines exposed to bodily injury claims recorded cumulative underwriting losses of USD 43 billion. In response, capacity available to global businesses has significantly declined, while rate increases have not kept pace with loss trends."

While social inflation is primarily a US phenomenon, there are signs it is impacting other countries with common-law systems such as the UK, Australia and Canada, where tort law is based on precedent. Based on Swiss Re's index analysis, social inflation contributed more than 10% of liability claims in the UK in 2023. This increase is due to US spillover effects, reflected in claims that a company submits to its UK insurer after a large compensation award in a court case in the US. Similarly, in Australia and Canada, the effect was around 7% due to an expansion of mass tort claims. Tort law in continental Europe, on the other hand, is governed by comprehensive civil codes, and tort cases are adjudicated by professional judges rather than juries. So far, social inflation has not been meaningful in countries like France and Germany. However, mass tort claims could expand in the EU due to significant legislative changes in product liability and representative actions directives.

Addressing social inflation: a joint effort

An effective approach to addressing social inflation could come from the legal system itself, through a reform of tort law aiming at limiting the scope of non-economic damages. Transparency and regulation of TPLF would provide clarity and consistency in tightening disclosure requirements. At the same time, insurers need to invest in risk assessment and modelling, defensive tactics and better claims management. Leveraging new technologies and improved data analyses will also help in preparing for the future claims environment.

Social Inflation Index – methodology

To measure social inflation more accurately, the Swiss Re Institute constructed a ‘Social Inflation Index’. To this end, it subtracted real GDP growth, a proxy for exposure growth, and actuarial assumptions for claims frequency from claims growth to create a proxy for claims severity. For the economic inflation component of the social inflation equation, it selected the macroeconomic cost drivers with the highest correlation to liability claim severity and calculated a weighted average of the claim variables reflecting the respective strength of the correlation. All variables were analysed as three-year moving averages.

How to download this study

Swiss Re Institute's publication "Litigation costs driving claims inflation – indexing liability loss trends" is available here.