Social inflation continues to be an issue when it comes to insurance placement, renewals and controlling losses. Social inflation affects insurance premiums and retained losses across the board for many health care organizations. Social inflation is defined as all the ways in which insurers’ claim costs rise over and above general economic inflation and expected claim development.
Many factors are involved with social inflation. Changing jury demographics; society’s desensitization to large jury verdicts and settlements; use of new psychological tactics by the plaintiff’s bar; and liberal treatment and interpretation of claims create the foundations of social inflation. Compounding large loss events such as wildfires, floods, earthquakes, pandemics and socially inflated medical malpractice litigation continue to place stress on the insurance market.
Social Inflation Roots
We began to see social inflation back in the 1970s and 1980s, and again in 2019 through 2021. Today social inflation may wear the term “nuclear verdict,” “superimposed inflation,” or “runaway verdicts.” Within the insurance market, we are now living in what is called a “hard” market. This means that insurance premiums are increasing along with increased deductibles/retentions, policy exclusions and less capacity within the market resulting in placement of insurance becoming more challenging.
Risk managers across the globe are tasked with managing their financial portfolios when it comes to litigation, risk mitigation and insurance placement for the enterprise.
We began to see social inflation back in the 1970s and 1980s, and now again in 2019, 2020 and 2021. Today, social inflation may wear the terms “nuclear verdict,”“superimposed inflation” or “runaway verdicts.”
I interviewed Richard Frese, FCAS, MAAA, a principal and consulting actuary in the Chicago offices of Milliman Financial Risk Management. He addressed systemic changes within health care, causes of social inflation, combined ratios of impacted lines and the foundations of premium increases. Also, he shared how social inflation is tied to increasing claim costs when organizations experience medical malpractice lawsuits and claims.
Reserving Philosophies Development
Organizations must develop laser-focused reserving philosophies to ensure that their financial portfolios are accurate and project both short- and long-term losses on the risks that they retain. Risk managers must also look at frequency and severity to determine trending patterns across the enterprise. They then must work with their respective actuarial team to determine any trends or insights shown in the data, as well as monitor loss development as claims progress and develop. Many factors such as cause of loss, location of loss and physician involvement should be included in the data set to tell the complete story of a particular risk or loss exposure.
Ensuring data is accurate is another challenge that risk managers face. Accurate data helps improve current and future loss actuarial modeling and projected losses. In Frese’s recent article, “Assessing Social Inflation’s Disruption To Data, Metrics and Forecasts: 10 Mitigation Strategies,” he discusses the reliability of data and reasonable forecasts, as we move through uncertainty in health care.
Frese points out the challenges of the pandemic such as its effects on delayed court cases, lock-downs, as well as fewer medical malpractice case filings. He warns that these factors may give a false sense that social inflation is on the decline.
Risk Mitigation Strategies
Here are Frese’s recommended risk mitigation strategies for health care risk managers to put into play in 2022 to set the stage for a successful risk program:
- Ensure risk management is optimal
- Review insurance contracts
- Differentiate your risk program during insurance renewals
- Consider different risk financing options
- Gather data and compare strategies
- Isolate impacts on budgets and data
- Provide frequent updates
- Use technology to tell the story
- Make sure defendants are prepared
- Learn from the past
These strategies are on point when risk managers are looking to solidify and improve their current program and practices.
Leigh Ann Yates, AIC, MBA, CPHRM, DFASHRM has more than 25 years in health care risk, legal and insurance program management. In her practice, she consults nationwide for large health care and academic systems. She continues to practice and share with colleagues what she has learned throughout her career journey.