Social inflation has become the buzzword in insurance in recent years, and the exact definition, causes, impact and outlook for the future remain fuzzy to many companies.

Social inflation broadly refers to the rise in liability loss costs beyond what would be expected from economic inflation alone. Insurers must accurately predict trends over time in the business they are insuring, otherwise premiums will be inadequate to cover liability claims that may settle years from now.

Social inflation is not new. In fact, in the late 1970s and early 1980s, when U.S. inflation was averaging 10-15 percent per annum, tort costs as a percentage of real GDP were increasing on the order of 15-25 percent per annum. This ultimately led to structural changes in the insurance system, a liability insurance crisis, changes in policy forms and introductions of exclusions, and a significant market hardening in the late 1980s.

The current social inflation challenges have come on the heels of a decade-plus of benign liability trends in lines such as general liability and medical malpractice. But sometime around 2014 or 2015, the trends began to reverse. Insurers began to experience a frequency of severity. For example, in medical malpractice, the proportion of claims settling for over $3 million increased by nearly 50 percent almost overnight. Companies writing lead umbrella saw more losses piercing their $1 million attachment point, and claims settling for hundreds of millions of dollars became much more commonplace.