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What Is Social Inflation, and How Does It Affect You?

by Posted in Commercial Insurance, News Tagged , ,

As if the Florida insurance markets don’t have enough challenges, there’s a relatively new concept causing concern here as well in the rest of the country: social inflation. In fact, some insurance industry experts list it as one of their main concerns in 2023.

What is social inflation?

Social inflation describes the impact on the cost of insurance claims caused by rising litigation costs. These costs are different from those related to traditional inflation—things like material costs, labor prices, or supply chain issues. One example of the impact of social inflation: According to a report released March 6, “U.S. commercial auto insurance liability claim payouts increased $30 billion more than would have been otherwise expected between 2012 and 2021 due in part to social inflation.”

The primary factors influencing social inflation include:

  • Runaway litigation—insurance companies face a much higher than normal number of lawsuits.
  • “Nuclear” verdicts—an increase in huge jury awards.
  • Rollback of tort reform which placed limits on non-economic damages.
  • Litigation funding from third parties—third parties provide legal funding to clients and their attorneys in exchange for a share of a winning jury award or arbitration, often resulting in legal proceedings that take longer than expected (another driver of social inflation).

The use of the word “social” indicates that the attitudes of society play a role. Negative attitudes of the public toward corporations, a desire to “see someone pay” when an accident occurs, and the ability of plaintiffs’ attorneys to play on the sympathies of a jury all affect litigation costs. At this time, social inflation is primarily affecting commercial auto insurance, professional liability, product liability, excess liability and umbrella policies, and increasingly, personal auto insurance.

How does social inflation affect you?

As we’ve seen in the Florida homeowners insurance market, the actions of some affect what we all pay for our insurance. Social inflation makes insurance cost more because it inflates the cost of claim payouts. It likely also increases the costs of goods and services, because when businesses have to pay more for insurance coverage, they pass some of that cost on to their customers.

Insurance companies have tools to plan for factors influenced by traditional inflation, but social inflation is unpredictable and hard to foresee. If social inflation continues for a significant amount of time, insurance companies may not be able to keep premium increases in line with the rising costs of claims. This threatens the solvency of insurance companies, and in some instances, results in insurance companies deciding not to write certain coverage at all. This makes it harder for you to get the insurance coverage you need.

What can be done about social inflation?

Insurance companies have become more aware of social inflation, and are doing what they can to mitigate its effects, including improving risk management practices, educating the public, and advocating for more transparency around third-party litigation funding.

As an independent insurance agency, L & M Insurance Group partners with multiple commercial and personal lines insurance carriers, and monitors insurance markets for current trends. If you need a quote for commercial auto, personal auto, homeowners insurance, commercial liability, or any other form of business or personal insurance, please give us a call at (813) 672-4100, or contact us online. Because we’re independent, we have much more flexibility in finding insurance coverage tailored for your specific needs.

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I’ve Never Had a Claim—Why Does My Insurance Keep Going Up?

by Posted in Auto Insurance, Homeowners Insurance, News Tagged , , , , ,

This is a common complaint among our customers who find their home and auto insurance rates continue to rise, even when they haven’t had any claims. We know this can be frustrating and we always do our best to find the most competitive insurance rates, no matter what type of insurance our clients need.

As we’ve noted before, the Florida insurance marketplace has some unique challenges, but the cost of insurance is rising in most states. Insurance companies look at many factors when they set their rates, only some of which you can influence—like keeping your driving record clean or improving your credit score. But there are some things which are beyond both your control and your insurance company’s control, factors which are at work in the industry at large. Here are a few things which affect the price of your insurance—even if you, personally, don’t have a claim.

Insurance is a “pool of risk”

First, understand that the central function of insurance is the sharing or pooling of risk. In return for a premium, the insurer agrees to pay for the covered losses of its policyholders. As the Insurance Information Institute (iii.org) rather poetically explains, “If risks—chances of loss—can be divided among many members of a group, then they need fall but lightly on any single member of the group. Thus misfortunes that could be crushing to one can be made bearable for all.”

Insurance protects against catastrophic loss, and in that role it helps to keep society functioning. We couldn’t get credit to buy a house or car, or to start a business if creditors couldn’t have some guarantee of being paid back in the event of a loss. A family who loses a home and all their belongings in a fire would be devastated without an insurance policy. A small business owner could lose everything if someone sued them after slipping and falling at their business. Insurance helps protect us all from financial ruin.

Claims have become more frequent

So remembering that insurance is a pool of risk, if claims become more expensive or more frequent, everyone in the pool will be affected. Simply put, you may not have made a claim, but plenty of other people have. According to Climate.gov, “In 2021, the U.S. experienced 20 separate billion-dollar weather and climate disasters, putting 2021 in second place for the most disasters in a calendar year, behind the record 22 separate billion-dollar events in 2020.” These events include wildfires, tornadoes, floods, and, of course, hurricanes. Plus, those claims numbers don’t include the more mundane events that take place every day—the fender benders, the burst pipes, and so on.

The cost of everything is increasing

This includes the costs to rebuild or repair homes and vehicles in the event of a loss. Home renovations, demand for new construction, and supply chain issues have limited the availability of construction supplies and materials, inflating prices. Auto claims costs are also rising because of similar factors.

Another significant expense for insurance companies is the rising cost of reinsurance (insurance for insurance companies).

Because of these factors, the cost of doing business has insurance companies scrambling. In order to stay in business themselves, they pass on these increased expenses to policyholders.

L & M Insurance Group—your independent agency

Despite the cost, buying appropriate insurance is still one of the best ways you can protect your assets. If you want to be sure you’re paying the most competitive rate for your insurance, why not call a local, independent agency like L & M Insurance Group? Our agents are well-versed in the Florida insurance marketplace and will be happy to answer your questions and give you a quote. We handle personal lines, such as homeowners and auto, as well as business insurance, health, and life insurance. Please call (813) 672-4100, or click here to contact us online. Let us help you find the best insurance coverage at the most competitive price.