Cost Strategies

Adapting Cost Strategies to Manage Social Inflation and Legacy Claims

Key Findings

Compared to last year, there is a marked increase in carriers identifying legacy claims as a challenge to profitability and efficiency, with global figures rising from 62% to 76%.
Carriers are increasingly partnering with claims and risk management partners to enhance claims management, improve data efficiency, and streamline system integration.
55% of North American carriers are planning to increase premium rates to manage pricing and underwriting strategies.
While the percentage of litigated claims being resolved has remained relatively consistent over the last decade, the average settlement amounts for these claims have risen significantly.

An uptick in the impact of legacy claims

Longtail exposures can have a substantial impact on a carrier’s financial reserves, and in today’s increasingly challenging market, this impact appears to be compounding. This year, 76% of carriers across the globe reported that legacy claims posed a challenge to organizational profitability and efficiency. This is a 14-percentage point increase from the previous reporting year, with North American carriers sharing similar sentiments — 71% reporting that legacy claims in casualty lines were a key challenge.

These concerns have made legacy claims a primary focus for North American carriers, many of whom are assessing the effectiveness of their current support and long-term strategies to manage legacy claims. The focus also extends to systems and processes that no longer align with modern technology and ways of working, which is a cost-intensive issue to address. Over time, the resources dedicated to handling these systems diminish, causing additional strain on business resources. For organizations that are familiar with these challenges, working with a strategic partner is a cost-effective way to open the door to greater efficiency and enhanced technology. As legacy portfolios begin to close out, leveraging the value of a strategic partner and award-winning technologies becomes even more important to identify and unlock growth opportunities.

The rise of claims and risk management partners in legacy claims handling

To manage the growing challenges of legacy claims, 35% of North American carriers are choosing to partner with third-party claims administrators. By partnering with an external expert, carriers can significantly enhance their legacy claims management, improve data management efficiency, and integrate systems more effectively.

As technology rapidly advances, many carriers are constrained by outdated claims systems. These legacy systems pose significant integration challenges, compliance risks, and inefficiencies in claims management. By leveraging advanced data analytics, carriers can gain data-driven insights into legacy claims, identifying hidden patterns and emerging risks. This empowers carriers to make informed decisions, optimize workflows, and proactively address challenges unique to legacy claims. Moreover, access to performance benchmarking metrics allows carriers to set realistic performance goals, monitor progress, and align strategies with industry best practices. This fosters a culture of sustainable excellence and elevates the overall efficiency and effectiveness of legacy claim portfolio management.

Settlement costs of litigated claims remain high

Globally, 54% of survey respondents report that litigated claims are settling at higher costs, with North American carriers marking a two-percentage point increase in these claims closing at a higher cost. This rising trend draws attention to growing concerns regarding the financial burden of claim disputes worldwide amid a discernible shift toward speeding up resolutions despite financial escalation.

It is important to use advanced data analytics to tackle social inflation effectively and stay ahead of potentially high claims damages. Early detection of trends and patterns in claims helps refine your risk profile and enables proactive decision-making. Partnering with experts with access to a world-class RMIS suite, Luminos can enhance your analytics capabilities for smarter, data-driven decision-making.

Social inflation driving premiums up

In times of economic volatility, social inflation poses a growing challenge for insurers across all markets. This global trend, fueled by rising jury awards, monetary devaluation, and more lenient workers' compensation rulings, is driving insurance losses upward.^[¹^]

According to the Insurance Information Institute, social inflation has significantly impacted insurance claims, contributing an estimated $30–34 billion (18–20%) increase in commercial auto liability claims from 2012 to 2021. Research suggests that social inflation may be driving losses to rise 2–3% annually above general inflation rates. Similar trends have been observed in other liability occurrence and medical malpractice claims-made categories, highlighting its broad influence across multiple insurance lines.^[²^]

While controlling social inflation remains challenging, carriers are opting for various strategies to help navigate its effects.

Across North America, 55% of carriers are increasing premium rates as part of their strategy to manage pricing and underwriting in response to the impact of social inflation on coverage levels. However, this represents a 13-percentage point decrease compared to the 2024 survey, with carriers now shifting to other means to address concerns, including coverage limit modifications and pricing updates for litigation costs.

These adjustments further reflect a broader industry effort to balance the financial sustainability of insurance offerings with the evolving landscape of risk and coverage demands. As social inflation continues to influence the cost of claims and coverage, carriers are proactively adapting their approaches to ensure they can continue to provide comprehensive and effective insurance solutions.

In direct response to the impact of social inflation on the cost and complexity of claims, 51% of global and 48% of North American carriers are increasingly turning to alternative dispute resolution methods as part of their claims settlement strategies. Some carriers are addressing social inflation through proactive approaches to litigation, such as mediation to resolve disputes before jury trials, targeting structured settlements that offer tax advantages, or even agreeing on high/low brackets on jury verdicts to reduce financial uncertainty.

By adopting these alternative dispute resolution methods, carriers can streamline the claims settlement process, reduce litigation costs, and achieve more efficient and equitable outcomes. This approach helps manage the financial pressures associated with social inflation and enhances the overall claims experience for policyholders by providing faster and potentially less adversarial resolutions.

Settlement rates remain consistent, but values rise

Over the past decade, GB’s data shows that settlement rates have held steady, fluctuating between 73% and 77%. However, the average settlement amount has seen a significant increase. In 2014, GB reported an average settlement of $41,000, which rose to $64,000 by 2023.

Rates of inflation notwithstanding, this increase in average settlement payments underscores the impact of various factors, such as social inflation and rising litigation costs, on the overall cost of claims. These trends underscore the growing financial burden on carriers, as reflected in GB's extensive claims management experience.

To mitigate these rising costs, it is crucial for carriers to adopt proactive risk management strategies and leverage data analytics to better predict and manage potential claims. Additionally, fostering strong relationships with legal experts and investing in comprehensive training for claims adjusters can help in effectively navigating the complexities of modern litigation.

^[1]^{https://insurers.gallagherbassett.com/insights/six-strategies-for-managing-social-inflation/}
^{[2] Lynch, Jim, and Dave Moore. “}^{Social Inflation and Loss Development — An Update}^,”^{Insurance Information Institute}^{, accessed 10 Dec 2024.}