Social Inflation in Life Insurance Claims

A trend that has drawn a lot of attention in recent years is social inflation, which describes how insurers’ claim costs are rising faster than average economic inflation. This trend has affected particularly the U.S. property and casualty (P&C) insurance sector, where it has led to higher payouts for commercial auto liability, medical malpractice and other lines of business. A 2022 study¹ by the Insurance Information Institute and the Casualty Actuarial Society (CAS) estimated that social inflation added $20 billion to commercial auto liability claims from 2010 to 2019.

Social inflation is a hidden risk for the life and health industry, even though it is well-known in the P&C sector. This conclusion is based on the observation that life insurers seem to increasingly favor settling cases before they reach a jury. In fact, despite having grounds to deny the claim based on their policy wording, data shows that 55%² of cases are settled, and this number has grown over time. The reasons for this are twofold:

1. Attempting to avoid unpredictable verdicts
2. Reducing the time and cost involved in insurance litigation

We used data³ from Swiss Re’s U.S. life insurance claims database on litigated claims to examine how social inflation affects the U.S. life insurance industry. This data enabled us to categorize litigated claims into four groups and uncover important claim trends.

We offer practical suggestions for life insurers to help address social inflation focusing on the following areas:

• Underwriting and claims management practices
• Use of data and analytics to detect and prevent fraud
• Increasing awareness of policy and regulation

The word “social” refers to the shifting social and cultural attitudes that influence how people view and pursue compensation for losses and damages. Factors such as the demographic composition of juries, the spread of social media and anticorporate sentiment, and the advertising of plaintiff lawyers may have created a situation where insurers face more lawsuits, higher settlement demands and bigger jury verdicts.

Social inflation may be partly driven by the rise of third-party litigation funding (TPLF),⁴ which is the practice of outside investors funding lawsuits in exchange for a part of the possible recovery. A Swiss Re report⁵ says TPLF is a $17 billion global industry, with more than half of it coming from the United States. TPLF can lead to more litigation, longer legal disputes and higher settlement values.

While the life and health industry has not received much attention in the literature and discourse on social inflation, that does not mean that the life insurance industry is unaffected by it. Life insurance claims generally are subject to less variability and litigation compared to P&C claims. However, there are still areas where social inflation can pose a risk for life insurers. For example, social inflation can affect the claim experience of life insurers that offer products such as permanent and term insurance, long-term care, disability income and annuities. In our experience, these products often involve complex and subjective determinations of eligibility, contestability, benefit levels and duration of payments, which can lead to disputes and litigation opportunities for claimants and their lawyers.

One may wonder what a claim litigation process looks like. To answer that question, we will walk you through a fictional set of facts, not unlike typical claims we’ve experienced.

Insurance Litigation Case Study

Meet John, 50, a husband and father of two living in Tampa, Florida. John was an avid and experienced surfer. One day tragedy struck when John drowned while surfing at a beach that he frequented. John’s wife, Jane, filed a $200,000 accidental death claim with their life insurance carrier shortly after the incident. In reviewing the claim, the adjudicators at the company found that the death certificate noted the cause of death as “atherosclerotic disease,” yet the manner of death was marked “accidental.” The question then arose whether the death was a result of a heart attack that led to John falling off his surfboard or whether he fell off his surfboard for some other unrelated reason. Investigations appeared to support the former and the accident claim was denied. A suit was filed against the life insurance company for breach of contract.

The company maintained that the evidence for denial was strong. It also acknowledged that court decisions are unpredictable. Emotions would play a strong part in the strategy of the plaintiff’s counsel, and the interpretation of evidence by expert witnesses would contribute to the downside risk of a court appearance. Settlement seemed to be the most prudent route when balancing the demands of the plaintiff against other factors like jurisdiction, resource strain, cost of litigation and uncertainty of outcome. Although a settlement eventually was reached in this case, the legal expenses exceeded the face amount of the policy.

Data and Methodology

To answer the question of whether there exists a latent risk for increased social inflation for the life and health industry, we examined empirical data, using data from Swiss Re’s internal reinsurance database on life insurance claims that went to litigation in the U.S. market. The data has information on claim count, claim amount, settlement amount, duration of litigation, the cause of death, policy type and so on. We chose to examine the period 2010–2022, as we wanted to see the most recent trends and prevent the potential bias from incomplete data in 2023 and 2024, since some disputed claims may take more than a year to resolve. We also discuss the implications of our findings for the life and health industry and suggest possible mitigation strategies.

We acknowledge that the data may have some limitations. For example, there may be some outliers or unreported cases that clients did not disclose to the reinsurer. However, we believe the data reflects a valid sample of the whole population of life insurance claims in litigation in the U.S. market, as Swiss Re is established in the life and health industry and has a broad and diverse portfolio of clients.

We started by looking at the general patterns from the data, investigating different parts of the data and various descriptive statistics. Then, we tested the hypothesis of whether there’s a sign of social inflation for life insurance claim settlements. We split our analysis into two actionable areas:

1. Examine the overall data trends, including the annual number of newly litigated Swiss Re claims, average claim settlement, litigation costs as a fraction of face amount and the distribution of cause of loss for litigated claims.
2. Analyze experience data to determine if evidence of social inflation exists or is emerging.

Results and Discussion

A line graph of the real number of Swiss Re new litigated cases per year compared to the expected number of new litigations per year is displayed in Figure 1. The number of new Swiss Re life insurance claims that went to litigation has slightly declined from 2010 to 2022. This trend is more noticeable when taking into account that the number of Swiss Re claims has risen over time, particularly during the pandemic.

As shown in Figure 2, about half of all Swiss Re litigated claims take at least a year to settle, and a substantial ~23% of litigated claims last more than two years before settling, suggesting that many litigated claims are complex and contentious, requiring more time and resources to manage and resulting in high legal costs. This finding was stable across the study period with minor variations.

Figure 3 shows the average Swiss Re settlement and litigation costs as a percentage of face amount, excluding zero settlements but including all others (even settlements above the original face amount). The average face amount grows yearly at around inflation. The good news is the average settlement size does not appear to increase relative to face amount over time. For the outside counsel and investigator costs compared to face amount, we see a rising trend from 2012 to 2018, and then a more erratic pattern. Of note is the fact that about 40% of cases in litigation used outside counsel, and this proportion did not change much over the analysis period.

The last feature we examine is the cause of loss for claims that went to litigation, which we display in Figure 4. The findings indicate that the cause of loss named “other,” which encompasses a wide range of causes (e.g., homicides, infectious disorders, renal disorders, liver disorders, etc.), accounted for the most—almost 30% of the reasons for the claim. This was followed by cancers and circulatory diseases.

The share of cause of loss that comes from suicides, accidents and drug- and alcohol-related claims is higher in the litigated claims than in the non-litigated claims. For instance, suicides and accidents are three times more common in the litigated claims sample compared to the rest of the portfolio. This is probably because these types of claims tend to have more ambiguity, and they may come up against policy exclusions or be the subject of misrepresentation, beneficiary disputes or fraud investigations.

Addressing Hypothesis: Life Insurance Is Not Immune to Social Inflation

To address the primary question of whether life insurance is immune to social inflation, we define the following buckets represented in Figure 5:

• Zero payment. This describes situations where the insurance company wins the case based on the policy terms and makes no settlement, represented by the bottom blue area.
• Less than full claim payment. Represented by the green area, it describes situations where the insurance company, while confident of winning the verdict, decides to compromise and pay a reduced claim settlement ahead of going to litigation to avoid an outsized large settlement, especially in states with sophisticated laws and litigation funding schemes. We call this green area the “region of uncertainty.”
• Full claim payment and more than full claim payment. Represented by the light blue and red areas respectively, these represent scenarios where the insurance company settles the claim amount in full or at an amount higher than the sum assured based on the insurance litigation outcome.

Figure 5 shows the four buckets during the study period. The chart indicates that, on average, more than half of all claims (about 55%) were settled for less than the full claim amount, which is the highest share of all litigated claim outcomes. The proportion of claims in this category began at 40% in 2010 and rose gradually to reach 67% in 2017, then it declined in the following years.

We make two assumptions:

1. If life insurance companies have incorrectly denied the claim, they would either pay the full claim amount or more (in the case of rising legal costs).
2. If life insurance companies are correct and prevail in court, they would pay nothing in settlement.

We therefore think that any settlement less than the full amount indicates the influence of social inflation. Perhaps insurance companies are resolving claims sooner as a precautionary measure to avoid the impact of social inflation, such as apparent or observed trends of increasing jury awards, the potential for litigation funding activity or jurisdictions that are perceived to be particularly punitive.

From these results, we conclude that:

• We think social inflation is a latent risk in the life and health industry, evidenced by the rising share of claim settlements below full-face amount and the longer litigation durations for litigated life insurance claims.
• Based on Swiss Re’s experience, the positive news is that the total number of litigated claims has not increased in recent years. Furthermore, the proportion of claim payments that are equal to or above the face amount has reduced while those with zero settlement have increased.

Advances in artificial intelligence (AI) and programs that aim to make underwriting and claims processes easier and faster—together with the push to improve customer experience—could continue to test the current risk management structures.

Addressing Potential Social Inflation Challenges

Social inflation may increase the expenses of claims and insurance litigation and make the claim outcomes more uncertain. It also may affect the determination of prices and reserves for life insurance products, as well as the capital and solvency requirements of insurers and reinsurers.

The consequences of social inflation are not only relevant for insurers. They also could be relevant for current and new policyholders. Increased insurer expenses also may translate to higher premiums, which could affect the broader economy.

To address social inflation, the life and health industry may wish to consider the following:

• Monitor and analyze the trends and drivers of social inflation, using both internal and external data sources, and incorporate them into risk management and decision-making processes.
• Constantly review and update underwriting and claims management practices, product features, terms and conditions to ensure clarity, fairness and compliance.
• Strengthen customer service and education strategies to foster trust and loyalty among policyholders and beneficiaries.
• Partner with reinsurers, industry associations and regulators to share best practices and insights.
• Involve internal counsel early and often, and where external counsel is retained, ensure they are experts in the state where the case is being litigated.
• Build and maintain a positive corporate image and reputation among the public and educate them about the impact of social inflation on policyholder costs.

By taking these actions, we believe the life and health industry could potentially manage and mitigate the risk of social inflation.

Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries or the respective authors’ employers.

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