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The term “social inflation” usually brings to mind jury trials and multi-million-dollar verdicts, often for claims involving serious injury for the claimant or negligence on the part of the defendant. But the effects of social inflation go far beyond these headline-grabbing cases.

The whole dynamic of social inflation that leads to nuclear verdicts has trickle-down effects that can impact any claim, including a basic auto injury claim for something as benign as a sprained ankle. That means even small and mid-size companies with relatively small auto liability exposure can and do pay the price.

Rising severity of commercial auto claims

shows that commercial auto claim severity has risen 72% since 2013, with a median annual increase of 6.3%. Economic and social inflation are big culprits behind the increase, contributing to an estimated $96 billion to $105 billion increase in combined claim payouts for U.S. personal and commercial auto liability claims between 2013 and 2022. For commercial auto alone, increasing inflation drove loss and defense containment costs up by 19% to 24%.

The driving factor is attorney involvement. Those big verdicts have set a precedent and highlighted opportunities to squeeze big payouts from even simple claims. As a result, lawyers are getting involved in claims that they previously would not have.

Data shows that attorney representation in commercial auto claims drove total loss costs up by 21% between 2015 and 2019. Auto bodily injury claims with an attorney involved settle at four times the dollar amount of those without an attorney involved.

These numbers correlate with a spike in attorney advertising, which has grown especially in more litigious states. Law firms spent $1.2 billion for television advertisements in 2023, a significant increase from the $393 million spent in 2005, according to a Washington D.C.-based tort research firm X Ante. Due to this increasingly targeted advertising, claimants are now more inclined to reach out to lawyers automatically.

A study by Sedgwick found that of litigated commercial auto claims, , compared to 43% in 2019. Overall, 67% of litigated claims have attorneys involved within the first 14 days of being reported.

Once an attorney gets involved in a file, claim settlement costs tend to increase from both an expense and indemnity standpoint. A soft-tissue injury with an attorney involved may cost three to four times more to resolve than a similar claim when there is no attorney involved. Ultimately, all customers pay the price for these increased costs in the form of ever higher insurance premiums.

Commercial auto has seen double-digit annual rate increases since 2017, when rates peaked. For insureds, that translates to premium increases upwards of 50%.

But all that rate hasn’t fixed the problem. Commercial auto’s combined ratio for 2023 exceeded 106. Rate increases are expected to moderate in 2024, but the sector will remain unprofitable.

Data shows that attorney representation in commercial auto claims drove total loss costs up by 21% between 2015 and 2019.

Mitigating claim severity

There are several strategies that insurers can implement that can help to mitigate rising claim severity and help to control costs for clients.

1. Loss prevention resources
Avoiding losses in the first place is the ideal way to bring down overall claim frequency and severity. Especially since the pandemic, distracted driving has become a chief driver of accidents. It’s possible that people became lax while there were fewer cars on the road and more prone to checking their devices while driving. Now that traffic has returned, those behaviors are hard to break.  3,522 people were killed and an estimated 362,415 people injured in motor vehicle traffic crashes involving distracted drivers in 2021. This is an increase of 380 fatalities compared to 2020.

Insureds can make targeted efforts to reduce distracted driving and enforce safe driving practices, including offering regular training sessions and installing fleet telematics systems to track dangerous driver behaviors such as hard braking, sharp turns or speeding.

2. Proactive Claims Handling
Carriers and their third-party administrators, or TPAs, can tackle early attorney involvement head on through more proactive claims management. Predictive modeling will be key. Platforms that identify high-risk claims can help to direct more attention and resources to those claims, ideally getting them settled before claimants have a chance to hire a lawyer.

For those platforms to work well, though, the industry needs better data to really understand what factors make a claim more prone to attorney involvement (i.e., type of injury, state where the claim is filed, prevalence of attorney advertising, involvement of other drivers, etc.).

Predictive analytics can be used to optimize claims management across a number of lines, utilizing early severity alerts to get the right resources and expertise on the claim faster. Fine tuning these alerts to focus on attorney involvement can inform more specific mitigating strategies.

3. Keeping a close eye on tort reform
Litigation abuse will continue to drive social inflation and worsening claim severity unless states take action to rein it in. , including capping non-economic damages, raising evidentiary thresholds, and putting limitations on legal advertising.

The insurance industry can raise awareness of the trickle-down effects of litigation abuse, and individual insurers will likely continue to advocate for reasonable tort reform for the benefit of anyone paying an auto insurance premium.