Social Inflation
Sangmin (Simon) Oh, Joint Program in Financial Economics PhD student
Social inflation refers to the increasing costs of insurance claims due to social factors such as the sentiment of juries, the trial landscape, and the response by lawmakers. In this paper, I study social inflation and its economic consequences. Using a panel data on commercial auto insurance contracts, balance sheet of insurers, and large historical verdicts, I empirically find that insurers respond to social inflation by raising premiums, reducing limits, exiting markets, and accumulating reserves. I develop a simple model to interpret these findings and quantify the potential risk of social inflation’s rapid spread to other casualty lines. This study is especially important as insurers are increasingly facing political pressure to cover “business interruption” claims stemming from the COVID-19 pandemic.