AM Best, the credit rating agency specialising in the insurance sector, has highlighted the continued impact of social inflation on US property and casualty insurers, with commercial motor liability among the lines facing significant cost pressures.
In its latest special report, the company examines how rising litigation expenses and claims costs exceeding general economic inflation are contributing to uncertainty in insurers’ reserve estimates and putting pressure on financial results.
According to AM Best, commercial motor liability insurance has been particularly affected by increasing legal expenses and the growing cost of settling claims. The company attributes these developments partly to higher jury awards, an increase in litigation and changing societal attitudes towards corporate responsibility, all of which can influence the cost of liability claims.
AM Best acknowledges the role of the US court system in resolving insurance disputes but notes that the use of procedural rules and increasingly sophisticated legal strategies can add to the burden on insurers. The company also identifies negative public sentiment towards corporations as a factor that may influence litigation outcomes. Certain practices used by claimant attorneys to pursue additional lawsuits or increase legal expenses can raise the overall cost of claims and contribute to larger jury awards.
“These factors can subsequently lead to higher rates paid for insurance coverage,” said Christopher Graham, Senior Industry Analyst at AM Best.
The company explains that social inflation differs from economic inflation, which measures changes in the prices of goods and services. AM Best describes social inflation as an increase in insurance claims costs that outstrips general economic inflation, driven by legal and societal developments such as rising jury awards, more frequent litigation and broader interpretations of liability.
“Legal system abuse comes in several forms and can have a severe impact on insurers’ results, particularly in liability lines of coverage,” Graham added.
AM Best reports that social inflation has contributed to rising ultimate claims costs in commercial motor liability insurance over several years. The trend is reflected in the growth of average claims severity, with the company highlighting a notable difference between economic inflation and the increase in early claims payments.
Between 2014 and 2024, economic inflation averaged 2.8% annually. By comparison, loss payments made during the first 12 months of commercial motor liability claims rose by an average of 6.4% a year over the same period, according to AM Best. This represents an increase of more than twice the annual rate of economic inflation.
The company also examines how higher commercial motor liability claims can affect the umbrella insurance market. These policies provide additional liability protection when losses exceed the limits of an underlying policy. Commercial motor liability cover typically has a limit of USD $1 million, meaning claims that exceed this amount may extend to umbrella insurance where the relevant cover is in place.
According to AM Best, umbrella insurance pricing broadly followed general liability pricing until 2018. However, as social inflation increased the cost of commercial motor claims and more losses extended into umbrella policies, pricing in the umbrella segment began to move away from general liability rates. The company reports that umbrella cover became more expensive and has not returned to its previous pricing levels.
“Through 2018, umbrella pricing tracked closely with general liability pricing,” noted David Blades, Associate Director at AM Best. “As social inflation began to impact commercial auto claims, and those claims spilled into the umbrella coverage, umbrella pricing diverged from general liability, becoming more costly.”
AM Best also identifies the duration of claims as a factor influencing insurers’ exposure to rising costs. The company notes that claims which remain open for longer periods may be more susceptible to the influence of jury precedents and are also likely to incur higher claims adjustment expenses.
In addition, the report highlights an increase in commercial motor claims frequency over the past decade after adjustments for settlement rates. AM Best notes that this development contributes to uncertainty around the difference between claims payments already made and the amounts insurers anticipate paying in the future.
The company also considers the potential impact of tort reform in reducing litigation-related expenses. AM Best points to recent legislative changes in Florida, where reforms to the legal system have helped counter excessive litigation costs. According to the report, these measures have contributed to a downward trend in average paid claims severity, illustrating how changes to the legal framework may influence liability claims costs.
