the impact of social inflation on insurance premiums

by | Jul 26, 2022

Social inflation is a buzzword insurers use to explain the rising costs of insurance claims resulting from primarily increasing litigation arising from more plaintiff-friendly legal decisions and larger compensatory jury awards.

While many industry experts put it down to general anti-corporate sentiment going back to the financial crisis, frustration over the health industry’s handling of the COVID-19 pandemic could play a large part in the acceleration of the impact of social inflation.

excessive payouts

The payouts awarded by juries over the last year have been breathtaking.

In May of this year for instance, a Minnesota a jury awarded $111 million in damages to a college student in May after a hospital and an orthopedic surgeon were found to have been negligent in treating his broken leg.

In April, a jury in Kansas City awarded $25 million to a family after an ob/gyn and hospital were found to have failed in properly treating a mother in labor, which caused brain damage to her infant.

But it’s not just the medical industry that is suffering. The trucking industry has been particularly hard hit. In recent years, there have been a number of instances where trucks were involved in an accident they were not responsible for and where they probably shouldn’t have even been found to be negligent – they were just basically in the wrong place at the wrong time – but because of the injuries sustained by other parties, verdicts of between $30 million and $100 million were awarded against the trucking company.

a change in attitudes

“People look at the world differently than they did 2 years ago,” said Bill Burns, a director of insurance research at Conning. “A jury may have awarded $5 million for a claim a few years ago. But then the pandemic hits, and we have the George Floyd incident, and we have people out of work and a shortage in baby formula. Yet, companies are still making a lot of money and many insurance companies are turning record profits. Today, that jury may look at a sympathetic malpractice victim and award $10 million for the same claim.”

With most people seeing a greater separation of wealth between the general population and large corporations, there’s just generally a feeling that someone needs to pay when someone has suffered damage or an injury, regardless of negligence.

This trend in awards corresponds with an upward trend in abuse and violence toward medical professionals. Hospitals across the country are reporting an increase of assaults on nurses and doctors. St. Mary’s Regional Medical Center in Maine for instance, reported about five times as many assaults on staff members in 2021 as there were in 2019.

One of the main reasons for this is that this trend in social inflation was further exacerbated by the COVID-19 pandemic. The health care industry has come under immense scrutiny for its handling of the pandemic, and this translated into a more hostile environment for health care providers.

Frustrated people often in pain and discomfort are forced to endure long delays in treatment and restrictions on visiting family who are hospitalized. While much of the blame should rest squarely on the shoulders of the government, people are lashing out at whatever target they can find and that often happens to be the health industry.

explaining rising premiums to medical clients

The impact of this on insurance premiums for health care providers has been dramatic. According to a study by consulting firm Milliman, average medical professional liability insurance rates had already increased by 35% from 2017 to 2019.

 Investment management firm, Conning found that direct premiums written for physicians increased a further 7% in 2021 (from $5.01 billion to $5.36 billion).

 Insurance premiums are expected to continue to rise through the coming years as insurers account for the increased risk. This is likely to put even more financial pressure on an already struggling health system.

 Insurance agents may experience resistance from some medical clients on the rising premiums. Medical practitioners point to a reduced number of claims against them in the last two years, for instance.

According to Medscape’s Malpractice Report of 2021, while 52% of primary care physicians were sued in 2019, just 42% were sued from 2020 through mid-2021. Similarly, 62% of specialists were sued in 2019, but just 56% were sued from 2020 through mid-2021.

The main reason for this is that many courts were closed as a result of the pandemic so fewer cases were heard. This backlog of claims that is starting to reach the courts, combined with the trend in awards, is the reason for premium increases.

 

Michael Richards

Michael Richards

President, Westwood Insurance Group

Michael began his insurance career over twenty years ago, working with a risk purchasing group, giving him a wealth of experience in both medical malpractice insurance and captives. Since founding the Westwood Insurance Group in 2001, Michael has developed solid relationships with many underwriters serving the healthcare and senior living marketplaces and is able to effectively help commercial agents with coverage for their clients

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