Imagine you are an insurance adjuster, and one fine day you receive an alert saying - another liability claim has turned into a multi-million-dollar lawsuit. What would you do in this scenario?
The above-mentioned scene where insurers receive unwanted notification with massive claims costs is called social inflation. Social inflation is not just a buzzword, as it is going to leave a lasting impact on the entire insurance industry.
To simply put together, social inflation in Property and Casualty (P&C) insurance refers to the phenomenon where the industry faces an unprecedented increase in claims costs, eventually increasing the overall premiums. Here, the cost of the insurance claim increases above and beyond the overall inflation rate.
But what are the factors responsible for this sudden upsurge in the premiums? Let’s give it an overview:
- The rise of litigation funding
- Legislation incentivizing litigation
- Proliferation of class actions and multidistrict litigation
- Judicial expansions of the bases for liability
- Pervasive anti-corporate and anti-insurer sentiment
- ‘Reptile tactics’ employed by plaintiffs’ attorneys
- The normalization of “nuclear” jury verdicts
Therefore, we can say that social inflation in insurance is not just an abstract concept, it is a real financial burden on insurers. It increases payouts on claims, enhances loss ratios, and raises insurance premiums, leaving both insurers and policyholders in a tough spot. But here’s the silver lining: artificial intelligence (AI) can help in overcoming all these obstacles with predictive analytics, machine learning, and automation to help lower these escalating costs.
In this blog we will dive deep into the intricacies of social inflation, its impact on P&C insurance carriers, and the role of Artificial Intelligence (AI) in its mitigation. So, let's get started.
Impact of social inflation on P&C insurers and how to counter it
Unlike economic inflation, which can be quantified based on historical data, social inflation is less predictable and more difficult to manage, leaving a huge impact on the insurer. Social inflation compels P&C insurers to persist in increasing prices and enhance their reserve strategies to handle any kind of financial strain.
While insurance carriers can’t simply stop social inflation, they can take some measures to counter its effects and to protect themselves from the impact.
To overcome social inflation challenges, the report by Geneva Association has concluded that insurance carriers and industry as a whole can:
- Lobby for legislation that sets limits on liability and highlights potential damages awarded to claimants.
- Improve legal defenses to get better results when claims are being settled based on judicial system.
- Get better at predicting the unpredictable and transforming tomorrow’s surprise claims into today’s underwriting decisions.
- Create new and updated insurance products that intentionally protect insurers from the impacts of social inflation by design.
While no one is expecting to get sued, one of the best ways to protect yourself and your business from the costly effects of social inflation is by ensuring a strong support and partnership with an individual or agency that has deep experience in mitigating the impact from multiple angles.
How do insurance companies use AI to mitigate risk
By now we all know that AI has already transformed the insurance industry significantly by providing data-driven solutions for risk management, claims management, and litigation outcomes. Here are some of the strategies which are driven by AI and can help P&C insurers mitigate the risk of social inflation:
Advanced fraud detection
With the most advanced tools and AI-powered fraud detection systems, insurance companies can utilize machine learning (ML) and predictive analytics to get a hint of probable risk in advance. AI uses historical data to identify all the patterns suggesting any misconduct such as exaggerated injuries, staged accidents, or misleading claims. By following this approach, insurers can maintain claim integrity and reduce unnecessary payouts.
With AI’s ability to access and handle large volumes of datasets, fraudulent claims can be identified in real time, minimizing legal obstacles and preventing expensive payouts.
Automated legal strategy optimization
Automation is one of the biggest trends delivering accuracy and a professional approach to tackle social inflation. Think of a newly developed AI which can efficiently manage and study thousands of legal proceedings and can come up with the best defense possible based on past outcomes, automation can do all that for you.
With automation, P&C insurers can handle litigation more efficiently and negotiate while having an upper hand.
Natural Language Processing (NLP) to analyze legal documents
A decade ago, we could not have imagined that something could flag the risk involved in legal proceedings, but today we can do it using NLP. With AI-powered NLP, P&C insurers can scan contracts, court rulings, and all the legal trends in the blink of an eye. NLP acts as your assistant that can highlight potential risk in a claim—saving time and money of legal teams.
Predictive claims analytics
With AI’s assistance, insurers can predict all kinds of litigation risks, assess claims seriousness, and guess settlement values accurately. On the other hand, machine learning enables insurers to evaluate the characteristics of claims, historical legal trends associated with it, and all the other economic factors to estimate the potential outcomes. Predictive analytics also help insurers in allocating resources efficiently, discussing and negotiating settlements, and lowering claim costs.
Sentiment analysis for jury and settlement predictions
Ever wondered what would happen if you could predict the behavior of any jury? With AI-powered sentiment analysis, P&C insurers can observe public opinions, examine social media discussions, and inspect hundreds of historical verdicts to estimate potential outcomes of social inflation. Based on this, an insurer can decide whether he wants to fight the lawsuit or settle it.
AI-powered actuarial modeling for social inflation trends
While traditional actuarial models need some time and effort to keep up with social inflation, AI powered models involve external variables such as economic scenarios, legislative changes, and social trends that help in refining loss projections.
By combining actuarial science and AI, P&C insurers can get a better understanding of future claim costs and can also adjust pricing strategies, if required. This allows insurers to have financial stability and maintain competitive premium rates.
AI-driven jury selection and litigation management
Let’s assume that you have reached a point where litigation is unavoidable, here, AI can help you select the jury members by analyzing their backgrounds, biases, and social media activities. By identifying and selecting the jury based on your preference and research, you can improve the chances of having a fair trial and can also mitigate the risks of nuclear verdicts.
Additionally, there are some AI-powered litigation management tools as well. These tools can easily follow up with court trends, judge rulings, and the strategies of opposition to refine legal defense approaches.
The future of AI in addressing social inflation
As AI continues to evolve, its role in combating social inflation will only grow stronger. Here’s a glimpse into what’s coming next:
- Advanced Litigation Prediction Models: AI will become even better at forecasting legal outcomes, empowering insurers with more accurate risk assessments.
- Deeper Integration with Actuarial Science: AI will enhance actuarial models, incorporating social inflation factors for more precise risk calculations.
- AI-Powered Mediation Platforms: Imagine AI-driven platforms that help insurers and claimants reach fair settlements faster, reducing litigation altogether.
- Enhanced Regulatory Compliance Tools: AI will assist insurers in keeping up with changing laws, ensuring compliance and reducing legal risks.
AI’s role in combating social inflation in P&C insurance
After learning about the complexities of social inflation and highlighting the ways in which AI can help, we can add that a P&C insurer can manage rising claims costs and mitigate risks by using predictive analytics, machine learning, NLP, and automation.
At first, social inflation might seem like a force to be reckoned with, but with AI you can definitely take some countermeasures to transform the P&C insurance landscape for good. But, for all the insurers still trying to embrace AI into their workflow, FBSPL is there for you.
At FBSPL, our experts can help you tackle all the risks associated with social inflation and provide AI and automation services that help insurers evade any unwanted legal troubles.
So, the next time a new claim lands on your desk, don’t worry, we have your back. Contact us for more info.
