1 May 2020
Social inflation has been a hot topic recently, but how will it be impacted by Covid-19? In this blog, I share some initial thoughts.
The unprecedented events surrounding Covid-19 have left many consumers and businesses in vulnerable positions. With the impact of social inflation becoming more apparent over recent years, there are concerns that Covid-19 will accelerate this trend.
What is social inflation?
Although the term social inflation has been in use for a decade, it has become increasingly popular over recent years.
Social inflation describes the rise in the cost of claims caused by higher court awards and legislated rises in claim payments driven by changing societal behaviour. Society has developed a culture of fault and large corporations are being increasingly seen as the one to blame, where society demands them to “right a wrong”.
We have seen recent court awards against large corporations of astronomical amounts, including a $4.7 billion award in 2018 in a class action lawsuit against Johnson & Johnson for alleged unsafe talc-based products and a $157 million award in 2019 to one man in a wrongful death case against two tobacco companies. In particular, corporate America increasingly faces hard-hitting plaintiffs and shifting juror demographics, where awards tend to lean more in favour of the consumer.
So how will this change with Covid-19?
Following the outbreak of SARS in 2003, many insurers have tightened up their policy terms by excluding communicable diseases and pandemics from their cover.
Business interruption cover that extends to losses caused by notifiable or infectious diseases also typically require the disease to be present at the premises, which in the case of Covid-19, would be difficult to determine. This means that, for standard commercial insurance policies, insurers may be under no obligation to pay out claims caused by the Covid-19 pandemic given the exclusions in place.
However, insurers may find themselves on the hook to pay claims because of social pressure, regardless of the exclusions in place.
In the first instance, refusing claims creates reputation risks and insurers could be cast as the “bad actors” of this crisis in the same way as bankers following the 2008 financial crisis. Reputations may be made or lost based on how insurers behave over the coming months.
A more existential threat comes from the state. Law-makers across the US states are looking for ways to shift the economic burden of Covid-19 to insurers. If pandemics are retrospectively deemed to be covered under business interruption policies, even the largest insurers may face significant risks to their solvency.
Social inflation was already a major concern for many insurers 6 months ago. Now we are seeing a defining global event which could crystallise their worst fears. Should insurers “do the right thing” or are they entitled to rely upon the letter of the law? Insurers may find themselves between a rock (retrospective legislation) and a hard place (the court of public opinion).
While attempting to navigate these tricky questions, insurers must be mindful of new exposures that they take on, as well the likely changes to the competitive environment over the coming months. For example, those who have invested more heavily in digital communication with customers and real-time tracking of business performance may now have a critical advantage.
Covid-19 starkly highlights the risk of being unclear on what is and what is not covered under an insurance policy. But more than that, it is a reminder that society expect insurers to protect people and, in particular, to provide products that don't turn out to leave them high and dry when the world turns on its head.