Unpacking the Insurance Industry’s “Social Inflation” Lie

By: Michael DeLong, Research and Advocacy Associate

Insurance companies are very fond of increasing their policyholders’ premiums and then crafting an explanation for the hikes that fits their interests, even if it doesn’t fit the data. Their latest fable: that rampant premium increases for businesses, non-profits, doctors, and truckers among other commercial insurance policyholders are the result of a new trend the insurance industry has dubbed “social inflation.” According to this account, lawyers, lawsuits, judges, and juries are suddenly becoming more aggressive and endorsing massive payouts in court, causing insurance costs to spike. But is this story true?

A new report by Consumer Federation of America (CFA) and the Center for Justice and Democracy (CJ&D) – INVENTING SOCIAL INFLATION 2023 – details the two key lies in the story industry executives and lobbyists are pitching. When we look at the data, the theorized “social inflation” does not exist and claims payouts by insurers are not skyrocketing. Instead, insurance companies are hyping up this assertion as an excuse to price-gouge businesses and consumers.

In recent years commercial insurance premiums have risen substantially and insurers are pinning the blame on the invented phenomenon of social inflation. This phenomenon, depending upon who is telling the story, stems from:

  • #MeToo and child sexual abuse claims
  • Lawyer advertising and case funding
  • Securities class actions
  • Millennials as jurors
  • Big verdicts resulting from worsening truck crashes
  • Growing number of lawsuits brought by shareholders, especially activists

Despite the new term, we have heard this before. As the CFA/CJ&D report (and the 2019 report it updates) explains, this is all part of the insurance industry’s economic cycle in which companies raise rates, blame the litigation environment for the hikes, push for restrictions on consumer legal rights, and – win or lose those battles – eventually forget about the problem when the economic cycle turns.  This has happened about every 12 to 13 years over the last half century.  The only thing different this time is the name.

Importantly, the basic underlying arguments don’t stand up to scrutiny. CFA and CJ&D reviewed claim and premium data from A.M. Best, which is the largest credit rating agency for insurance companies. Our review found that over the last twenty years, after adjusting for inflation and population growth, insurance claims payments have stayed essentially flat (and for some lines of insurance, payouts have gone down), while premiums have gone up and down in sync with the insurance industry’s economic cycle.

Furthermore, the number of lawsuits against insurance companies has not increased. Before the COVID-19 pandemic, the frequency of cases against insurance companies was flat for the prior three years and in 2019, the average settlement value dropped to the lowest in a decade. During the COVID-19 pandemic, case filings sharply declined, and the number of lawsuits filed in 2022 was even lower than the amount filed during 2021.

When we looked at some of the insurance coverages in which businesses face some of the most severe rate hikes, the data contradict the industry narrative.

For example, insurance companies say that medical malpractice premiums are rising because of growing pressure from lawyers, lawsuits, and jury awards. But, in fact, there has been a substantial decline in medical malpractice lawsuits over the last few years. According to a survey of over 4,300 doctors across 29 specialties conducted from May 21 through August 28, 2021, “U.S. physicians saw a decline in malpractice lawsuits during the pandemic.” But more than 6 in 10 medical groups reported that their doctors’ malpractice premiums went up since 2020, with an average increase of 14.3%.

So, if lawsuits are not driving up claims costs for medical liability insurers, what is? Nothing!  2021 saw the smallest level of claims payments, on an unadjusted basis, in more than a decade and the lowest level, on an adjusted basis, of all 23 years in the dataset.

Truckers hear the same thing. There is a real safety issue in the trucking industry that needs to be addressed, as CJ&D explained in a report last year. The trucking industry’s own studies show that horrifying large truck crashes are increasing while oversight is weakening, and further studies show that too many trucking companies knowingly disregard public safety. But less than 2% of trucking insurance claims turn into lawsuits. And while there are not many large jury verdicts, some are necessary to get a bad company’s attention and to alert an industry that reckless disregard for public safety will not be tolerated. And when you evaluate the data, claim payments on commercial auto policies (including those that cover long-haul truckers) are up about 34% over the last decade, but the premiums charged have increased by about 70%.  That disconnect is evidence that insurance company greed is the real inflationary pressure facing policyholders.

For fifty years, businesses and consumers have been the victims of periodic eruptions in insurance premiums, and insurers try to convince people that lawsuits and juries, or “social inflation,” are to blame. But historical data and our new report show that this has never been true, and it is not true today. Insurance costs are not going up because of large jury verdicts, frivolous lawsuits, or because Millennials are sympathetic to consumers and biased against large corporations. Instead, insurance premiums are rising because of insurer avarice, mismanagement, and inefficiencies. All the while, the insurance industry sits on a mountain of surplus cash and invests millions in lobbying campaigns to tame the chimerical social inflation by trying to squelch the ability to file lawsuits against them, and to reduce any payouts they would have to make if they are found liable.

The only way to stop these premium hikes is through better oversight and regulation of the industry and stronger consumer protections. Policymakers and regulators should reject insurance industry propaganda and focus on increasing industry accountability in order to better protect American businesses, nonprofits, and other consumers.