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How Social Inflation Affects Business Insurance: Employer Challenges With Practical Solutions

Contributor: Amy Tsou, CLCS, MLIS

October 12th, 2023 | 5 min. read

By Tony Calavitta

Have you noticed that, year after year, your commercial insurance premiums go up? Do you just accept these continual price increases as normal losses? Or do you wonder, “WHY?”

Continue reading this article to learn about how social inflation can be detrimental to running a business and (spoiler alert) why it contributes to the ever-rising cost of insurance for employers.

In this article, we will discuss what social inflation is, identify why it occurs, and provide you with actionable strategies to prevent it from reducing your business’s bottom line.

What is social inflation?

Social inflation refers to the increasing cost of insurance claims, that are driven by changing societal and cultural factors.

4 factors that cause social inflation

Here are the 4 main factors that contribute to social inflation:

  1. Economic Trends: The expense of insured services can affect the cost of insurance.
    For example – When property values rise, so does the price of property insurance.

  2. Legal Tendencies: The number of insurance claims can affect the cost of insurance.
    For example – The cost of medical insurance goes up when there is a pervasive pattern of increased claims.

  3. Jury Perspectives: The general ruling directions on claims can affect the cost of insurance.
    For example – When juries favor employee claims over company defenses, the cost of employment practices liability insurance rises.

  4. Media Influences: The public perception of claims can affect the cost of insurance.
    For example – If the media spotlights personal injury claims and successfully encourages higher insurance carrier payouts, the cost of general liability insurance increases.

Legal Tendencies: The number of insurance claims can affect the cost of insurance.
For example – The cost of medical insurance goes up when there is a pervasive pattern of increased claims.

Social inflation vs. employers – How social inflation can impact business insurance

To better understand how social inflation affects commercial insurance, here is a real-life example:

No doubt, you’ve heard of the infamous “hot coffee” court case (Liebeck v. McDonald’s Restaurants) that received extensive media coverage in 1994.

The lawsuit:

A woman who ordered a cup of hot coffee in a McDonald’s drive-thru and spilled it in her lap sued the restaurant for injuries, claiming that the beverage was served at an excessively high temperature.

The decision:

The woman, who suffered burn injuries from the coffee catastrophe, was awarded nearly $3 million in damages.

The aftermath:

Because this case was widely publicized, what do you think happened following this monumental decision? If you said that other similar injury lawsuits emerged, threatening the financial stability of the food and beverage industry, you would be correct.

With media attention fixated on the case and public opinion favoring the woman burned by the brew, nearly 1,000 other cases of spilled coffee ended in settlements and litigation damages against businesses.

These socially influenced cases left uninsured businesses, especially in the food and beverage industry, in hot water (…or coffee).

For employers, the overwhelming number of personal injury lawsuits created a higher demand for comprehensive business coverage. 

For insurance carriers, this overwhelming number of personal injury payouts created higher liability when insuring businesses. 

And not surprisingly, the cost of insurance premiums for commercial coverage skyrocketed, largely inflated by socially driven factors.

The problems – 4 ways that social inflation affects employers

Now that you understand how social inflation can affect the insurance industry, specifically commercial insurance, let’s dive into the problems employers experience when it does.

Here are the 4 most common ways that social inflation affects employers:

1. Insurance carriers experience reduced profit margins

Insurance providers make their money by collecting premiums from policyholders. This business model works because the incoming policy premiums generally outweigh the cost of outgoing claims payments. In other words, insurance carriers only profit when they spend less on claims than they collect from premiums.

So, what happens when insurance carriers experience a socially driven influx of claims?

Well, more claims mean more payouts. More payouts mean less profit. And, less profit means that insurance providers, using the above business model, have to adjust their rates to make their money.

2. Commercial insurance policy premium prices increase

When insurance carriers adjust their rates, it can happen in one of two ways:

Either they can reduce the scope of coverage offered under their originally priced policies – the cost of the policy premium stays the same for employers, but the value of the policy itself plummets. In this case, employers pay the same price for less coverage or a higher price for the same amount of coverage previously offered under the policy.

Or they can simply raise the price of the premium – the cost of the policy premium increases, but the value of the policy itself remains the same. In this case, employers pay a higher price for the same amount of coverage previously offered under the policy.

3. Employers have to pay more for the same coverage

With these two rate adjustments in mind, though employers have a choice between a higher cost or a lower value, they ultimately end up paying more for their insurance.

4. Increased insurance spending reduces company profit

And, what happens when the costs of running a business increase?

Well, higher costs mean less profit. And, just like the insurance carriers, employers will have to make adjustments to compensate for the consequences of social inflation.

The solutions – 4 ways that employers can combat social inflation

Are you now wondering how much of an increase in employer costs that social inflation can actually cause? According to the Insurance Inflation Institute, social inflation is responsible for nearly a 15% increase in the cost of insurance between 2010 and 2020.

I think it’s safe to say that you probably don’t want to pay the price of social inflation – So, to avoid falling victim to exorbitant, socially driven insurance costs, here are 4 proactive strategies you can take:

1. Develop a company safety program to mitigate your risk

The best way to reduce workplace risk is to mitigate potential losses. If your business has no claims to report, even socially inflated prices cannot drastically drive your coverage costs up.

One approach to achieving this is to develop a written safety program and communicate it with all of your employees. The Occupational Safety and Health Administration (OHSA) even provides guidelines on how to create an effective safety program that can keep your “workplace free from known health and safety hazards”

By prioritizing a sound safety program, your workforce will be informed of your safety policies and procedures, these safety policies and procedures will be more readily followed, and as a result, the cost of your commercial coverage will be safeguarded from inflated premiums.

For more information on how to develop an OHSA-compliant safety program and other ways to manage risk in your workplace, read 5 Safety Strategies to Scale Down Your Workers’ Comp Spending.

2. Regularly review insurance policies for your needs

Another way to avoid paying inflated insurance premiums is to regularly evaluate your policies for the needs of your business.

If you consistently know exactly what coverage you need and make necessary adjustments to your insurance policy to match these needs, you can save money that, otherwise, may have been lost to overspending.

3. Engage in legal reform measures that affect your business

Remember, the legal system and public perspectives play a role in social inflation. By advocating for changes to federal and state laws that contribute to it, you can prevent socially driven increases to insurance costs.

This involvement can include direct actions like supporting initiatives to reform tort laws, lobbying for limits on punitive damages, or even pushing for greater transparency in jury selection. It can also include indirect efforts to educate the public like publishing articles or speaking with media outlets about the consequences of social inflation.

4. Stay informed of trends and social developments that influence your industry

Finally, awareness is key! If you follow industry trends and social developments, you can curb the costly effects of social inflation by making smart, informed insurance decisions for your business.

Take the next steps to control your commercial insurance costs

If you are here, you want to take control of your insurance costs – And that is exactly what we are here to help you accomplish.

Don’t let social inflation increase your costs and decrease your profit margins!

Instead, implement the practical solutions you learned in this article to prevent the consequences of social inflation from compromising your business.

Need help applying these strategies? Here at Combined, our commercial insurance experts and HR specialists are ready to assist you!


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This article is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.