Social inflation is an ever-present concern in the property/casualty insurance industry, putting pressure on their reserve levels and overall financial stability. According to research from Swiss Re Institute, the U.S. is in a wave of social inflation, which is likely to continue for a while. The good news is that AI offers promising solutions to address these challenges, providing tools for better risk assessment and claims management.

Various well-known factors contributing to social inflation include high-cost litigation, increasingly resulting in nuclear verdicts (where juries award settlements that are substantially higher than expected based on case facts), as well as changes in societal attitudes—growing public distrust towards large corporations that is exploited by some attorneys.

In addition, we’ve also seen an influx of lawsuits, with so-called “bad actors” increasingly using sophisticated methods, including AI, to target specific geographic areas or types of organizations, such as long-term care facilities. These actors identify regions with a high concentration of potential claimants and engage with specialized lawyers who focus on such high-risk cases.

What this means for insurers is a heightened level of unpredictability and risk in their portfolios. As a result, they face an uphill battle in maintaining profitability and ensuring adequate reserves.

How Can P/C Insurers Address Social Inflation?

This new landscape requires insurers to be sophisticated in their methods, using AI to uncover potential litigation patterns and mitigate the impact of social inflation. By understanding where these claims are likely to arise and how they are developing, insurers can make more informed decisions about claims dispensation—and at the other end (underwriting)—about pricing and risk management.

Here are three ways that insurers can use AI to help mitigate the impact of social inflation.

• Predictive Analytics Can Help Mitigate Catastrophic Claims

Claims are not static. They evolve as medical conditions change and if attorneys get involved. With traditional claims management, adjusters need to evaluate cases regularly, reading and understanding new material as it becomes available. AI offers a more accurate and faster alternative. It works 24/7, monitoring incoming claim data in real-time, and promptly flagging cases for managers to prevent escalation. This increases the likelihood of resolving high-risk claims without ever going to court.

Integrating AI-driven predictive analytics into the claims process can result in reduced claim severity and more efficient allocation of reserves. By analyzing extensive datasets, AI can identify trends and predict outcomes with high accuracy, allowing insurers to anticipate potential high-severity claims and allocate resources more effectively.

• AI Optimizes Claims Management

AI streamlines claims processing, reducing the time and resources required to handle each claim. It automates routine tasks, improves decision-making speed, and enhances overall efficiency. Faster, more accurate claims processing helps minimize litigation and settlement costs. AI can also assist in triaging claims, prioritizing those that require immediate attention and ensuring timely resolution.

By leveraging this approach, customers are flagged about potential claim escalation, leading to substantial savings in litigation costs and more efficient claims management.

• AI Enhances Underwriting

Social inflation is driving insurers to refine their underwriting and pricing processes too. AI enhances underwriting by incorporating a broader range of data points into risk assessments, leading to more accurate pricing models that reflect the true risk profile of policyholders. AI can analyze factors such as historical loss data, economic indicators, and social media trends to provide comprehensive risk assessments.

In addition, it’s important for insurers to understand how different factors, including geographic and facility-specific risks, contribute to rising claim frequencies and severities. Certain regions or types of facilities—such as long-term care centers—may experience higher claim rates due to socio-economic conditions or industry-specific risks. AI can identify these high-risk areas and facilities by analyzing patterns in claims data. This allows insurers to refine their underwriting approaches, set more accurate pricing, and make informed decisions about which risks to underwrite. By adopting this data-driven approach, insurers can better manage their exposure and enhance their overall risk management.

Challenges and Future Directions

Social inflation can be a big headache for the P/C insurance industry, but AI offers some real hope. With advanced tools for predictive analytics, risk assessment, and claims management, insurers can tackle social inflation more effectively and keep their operations running smoothly.

AI isn’t just a cool new tech craze; it’s reshaping the insurance industry. It helps insurers get ahead of the factors driving social inflation, streamline operations, and make smart, data-driven decisions. As the industry evolves, insurers need to stay nimble, continuously tweaking their AI strategies to handle new challenges and regulatory demands. By embracing AI’s potential, insurers can create a stronger, more transparent, and customer-friendly industry. This will help them stay profitable and manage the pressures of social inflation and other emerging issues effectively.