Social Inflation Continues to Pressure US Insurers

Social inflation continues to pressure US property and casualty insurers, particularly in commercial auto liability, as rising litigation costs outpace economic inflation and create uncertainty in claims reserve estimates, according to a new AM Best report.

The report identifies litigation strategies, exploitation of procedural rules, and growing negative sentiment toward corporations as factors contributing to higher insurance costs. Plaintiff attorneys' tactics to increase lawsuits and litigation expenses can drive up claim costs and produce excessive jury verdicts.

"These factors can subsequently lead to higher rates paid for insurance coverage," said Christopher Graham, senior industry analyst at AM Best.

AM Best defines "social inflation" as increases in insurance claim costs beyond general economic inflation, driven by societal and legal trends, including larger jury awards, increased litigation, and expanded definitions of "liability."

"Legal system abuse comes in several forms and can have a severe impact on insurers' results, particularly in liability lines of coverage," Mr. Graham said.

The report found that commercial auto liability claim costs have been particularly affected. From 2014 through 2024, economic inflation averaged 2.8 percent annually, while commercial auto liability loss payments during the first 12 months increased at an annual rate of 6.4 percent, more than twice the rate of economic inflation.

Rising commercial auto losses also have affected umbrella insurance pricing. Commercial auto liability policies typically have limits of $1 million, with claims exceeding those limits potentially triggering umbrella coverage when available.

"Through 2018, umbrella pricing tracked closely with general liability pricing," said David Blades, associate director at AM Best. "As social inflation began to impact commercial auto claims, and those claims spilled into the umbrella coverage, umbrella pricing diverged from general liability, becoming more costly."

According to the report, umbrella pricing has yet to return to its previous relationship with general liability pricing.

AM Best also identified longer claim settlement periods as a contributing factor. Claims that remain open longer face greater exposure to evolving jury precedents and typically generate higher claim adjustment expenses.

Additionally, commercial auto claim frequency has increased over the past decade after adjusting for settlement rates, widening the gap between amounts already paid and expected future payments.

The report also points to tort reform as a potential means of reducing litigation costs. Recent reforms in Florida have helped offset excessive litigation expenses, with average paid claim severity trending downward.

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