‘Ordinary’ economic inflation is calculated by use of standard economic indices, such as the Retail Price Index (RPI), the Consumer Price Index (CPI) and the Annual Survey of Hours and Earnings (ASHE), all of which are provided by the UK Government’s Office of National Statistics.
Excess claims inflation, however, is the increase in the cost of a claim beyond that of ordinary economic inflation. Below are the definitions we have used in this analysis.
Excess claims inflation
Excess claims inflation is driven by many different types of inflationary factors, including the rising risk and costs associated with using new materials, medicines and technologies.
Examples of such inflationary factors include:
- Advances in medical science and technology.
- New categories of claims responding to shifts in the working environment or evolving technologies.
- Professional services spend, such as experts and legal costs.
- Cost of energy, transportation, construction materials and labour.
- Demand surges, for example, after an extreme weather event.
Social inflation is a subset of excess claims inflation. It is referred to as social inflation because the increased costs are largely attributed to social trends or movements. The rise of these social trends and movements resulting in an increase in the volume and costs of claims has meant this is an area causing understandable concern for insurers and their customers.
The ‘social trends’ that are increasing the volume and costs of claims include unanticipated emerging risks, shifts in the legal and regulatory environment, evolving societal attitudes, and demographic and political developments.
Examples of recent social movements resulting in an increase in both volume and value of claims include the activities and actions associated with Black Lives Matter, #MeToo, climate change activism (including Extinction Rebellion), COVID-19, the expansion of the gig economy and, currently, the cost of living crisis.
Along with social trends, procedural changes are facilitating an increase in social claims inflation for the UK market, including by virtue of:
- Third party litigation funding and collective or group actions.
- Growth of claims management companies (CMCs).
- Changes in the regulatory and legal environment.
It is worth noting here that litigation funding is a particular driver of social inflation in the US – which we will come on to. However, unlike in the UK, the US’s civil justice jury award system coupled with shifting societal attitudes in respect of classes of claim - such as environmental or discrimination based actions - is considered the main driver of social inflation in the US.