Franklin, TN ( -- Last week, Cumberland RIMS held their 2023 Annual Symposium, Brace for Impact, where inflation was a hot topic. "Adverse Impact of Inflation on your program" was covered by Beth Tansey from CNA, Laura Sprouse from Select Actuaries, and moderated by Mark Maitoso from Lockton on Thursday, February 23, 2023, at the Embassy Suites in Franklin, Tenn. 

Maitoso reminded the audience of the current cost of eggs which he recently purchased at $7.72, where in comparison, eggs were $1.20 only a couple of years ago in 2020. This example of eggs established the framework to cover the three legs of inflation: social, auto/physical damage, and medical. Social inflation is a topic of ongoing discussion. Social inflation has been going on for years. Rating requirements impact auto/physical damage which is politicized in many states. An example of this is auto bumpers. While the costs associated with auto bumpers are four times what they were, this impacts insurance rates significantly.  

Medical inflation pertains heavily to the workers' compensation sector, yet we have not seen the impact hit as grandly as one would think. Currently, $800 billion resides on insurance companies' balance sheets to cover reserves for future medical payment obligations. The $800 billion does not account for the couple of hundred dollars in billions of employers retaining their own risk. While workers' compensation makes up five to seven percent of the total insurance premium sold, it makes up 20% of outstanding liabilities (aggregated reserves), making workers' compensation huge for balance sheets. Workers' compensation is unique as reserves are booked for payments to be made five years from now. To complete proper gap accounting, organizations must establish reserves today. 

In 2017, a white paper, Leading with Empathy, published by Lockton and written by Maitoso, found that lost time claims had a three-and-a-half times better outcome when using an empathic claims model. The claim notes reviewed for the research of this white paper showed the repetitive nature of words surrounding fear and the affiliates of fear. If a payment is missed or falls through the cracks, fear continues, and when communication dwindles, the injured worker hires an attorney. There is an increased risk of fear, attorney involvement, and claim cost when there is an adversarial relationship from the claims adjudication standpoint or the employer's standpoint.  

Beth Tansey, SVP of Claims – Legal from CNA, provided the claims perspective of social inflation. Fear is a powerful thing and what attorneys utilize with juries. A small portion of claims are at risk of being impacted by social inflation, and nuclear verdicts drive the massive dollar amounts of these claims. Nuclear verdicts are influential through social media and make the news. The settlements or what happens three years later when the ruling is overturned does not make the news. Countless defense verdicts are never given attention through social media or news outlets. These verdicts are not considered newsworthy. "The insurance industry needs to educate the public," Tansey told the audience. "We do the right thing. It is not all doom and gloom." 

How do you educate the consumer? Looking at billboards and the settlements awards that make the news showcase huge numbers. A point raised by the panel included a discussion about why we do not see defense firms posting "THEY GOT NOTHING" versus seeing "we got our client $300,000." The plaintiff's bar has been in control for far too long. In addition, Tansey made the point that billion is the new norm. Society has become numb to million. Adding in Reptilion Theory, the plaintiff's attorneys strike fear into the jury members thinking this could happen to them and giving the logic that someone needs to pay, resulting in what turns compensatory damages into punitive damages when in all actuality, this could have been an accident. Societal propensity is to place blame, which tends to blame those with large pockets.  

Laura Sprouse from Select Actuaries offered insight into advising clients with inflation on their balance sheets. Actuaries utilize loss development triangles, looking at a client’s history of how claims pay out over time to project for the future. The past predicts the pattern for the future. Typical inflation components are accounted for as claims are grouped by accident year. Inflation is established within the development factor. It becomes hard to tease out what is based on inflation versus lag time from the pandemic versus development. One to two large claims within a year can be very distorting. Covid impacted the workers' compensation development factor due to medical care delay, and therefore, Sprouse shared that they stuck with their original estimates rather than taking IBNR down too quickly. 

Sprouse expressed communication as an imperative key component in working with her clients, understanding the cost of claims, and communicating effectively on the exposures. What exposures are inflation sensitive? Property values are going to impact your claims cost. Increases in payroll are not necessarily indicators of loss exposure. The cost of living adjustment amounts to two or three percent of an increase annually if you have an organization with the same number of workers and the same amount of work with the same exposure to loss. When organizations have a five percent or higher increase in payroll, two to three percent is assumed to be the cost of living, with anything additional accounting for natural growth. Actual growth may not be accurate if an organization gives all employees a five percent raise. It will then be essential to consider the prior year's payroll for effective forecasting.  

The panel concluded that insurance companies are retaining more financial risk. The reinsurance space has paid out a lot over the past decade, and now insurance companies are getting less coverage for a lot more money. We want to continue cultivating awareness of inflation for the foreseeable future. 

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