One of these factors is social inflation, a phenomenon that has been impacting insurers for some time now. In this blog article, we will delve deeper into what social inflation is and how it affects your insurance rates.
Defining Social Inflation
Social inflation refers to the societal trends that are leading to higher claims payouts. These trends include the rising cost of medical care, a generally more litigious society, and current juries awarding higher damages for similar claims compared to historical juries. There is also financial inflation, including the rising costs for building materials and vehicle repairs, but those issues are not driving premium increases to the same degree.
The Impact of Social Inflation on Insurance Rates
Social inflation affects insurance rates in several ways.
- First, insurers are forced to pay out more in claims, which leads to higher premiums for policyholders.
- Second, the potential for high payouts encourages more litigation, leading to an increase in court costs and settlements.
- Finally, insurers must set aside larger reserves to cover potential payouts, which ultimately affects their bottom line and the cost of premiums.
How Businesses Can Protect Themselves from Social Inflation
While social inflation may seem like an unstoppable force that businesses can do little to combat, there are steps you can take to protect yourself from the impact of rising insurance rates.
- First, it’s essential to incorporate effective risk management strategies into your operations. Preventing the accidents that lead to claims is the best way to keep both your loss runs and your premiums looking good.
- Second, although premiums are important, consider selecting an insurance carrier that has some expertise handling claims in your industry. Claims professionals with specially developed skills around these claim types can sometimes achieve more favorable results with a better up-front investigation and carefully crafted resolution plan.
Social inflation is a complex phenomenon that has been and will continue to impact insurance rates. By understanding its underlying causes, businesses can take proactive steps to protect their assets and help reverse the current trend. Incorporating risk management strategies can help mitigate potential claims, reducing the likelihood of litigation and the associated costs. Partnering with a strategic insurance partner with relevant expertise can help reduce claims costs. While the future of social inflation remains uncertain, taking proactive steps now can help mitigate its impact on your business’s bottom line.