The spectre of social inflation, confined mainly to the American insurance realm, has now extended its reach to European shores, casting a formidable shadow across the insurance landscape. This phenomenon, characterised by a surge in the frequency and gravity of liability claims, accompanied by inflated settlement figures, has evolved into a labyrinthine challenge for the industry to decipher. Rooted in heightened risk awareness and unfettered access to litigation avenues, this deluge of insurance claims has rendered the terrain increasingly complex to navigate.

This phenomenon impacts various insurance lines, such as public and product liability, motor insurance, professional insurance, medical insurance, workers' compensation, and Directors and Officers (D&O) insurance claims. Policies such as D&O liability, professional indemnity, auto coverage and general liability are particularly vulnerable to rising expenses of legal defence, increased settlement values and the prevalence of nuclear verdicts.

Nuclear verdicts – generally defined as jury verdicts of USD 10 Million or more – are not only one of the primary contributors to social inflation but are also a burgeoning reality. Research by the Institute for Legal Reform underscores their prominence, with nuclear verdicts most frequently being issued in product liability (23.6 percent), auto accident (22.8 percent) and medical liability (20.6 percent) cases.1

The Impact of TPLF on Social Inflation in Europe

Research by Swiss Re highlighted the role of Third-party Litigation Funding (TPLF) in social inflation – revealing that an estimated USD 17 Billion was invested into litigation funding globally in 2020, with the US accounting for more than half of this figure.2 The surge in TPLF is now having an increasing impact on European case volumes due to the threat of class actions.

The lull brought on by the COVID-19 pandemic has given way to a resurgence of monumental juror awards, coupled with a wave of developments in Europe. This resurgence, fuelled by the allure of substantial payouts, has emboldened financiers to pursue class-action lawsuits modelled on the American template. In fact, Europe and the UK are projected to constitute 16 percent of the global litigation funding market by 2025, estimated at USD 18 Billion.3 The same report forecasts that although the EU market remains comparatively small, the rise in the use of litigation funding is projected to grow annually by 8.3 percent in the next five years.

While Germany and the Netherlands are particularly active EU markets, the UK emerges as the largest TPLF market in Europe.4 In a post-COVID recessionary environment, the UK’s litigation funding market appears poised for further growth. The UK’s for-profit litigation industry has nearly doubled the size of its assets over the past three years, as unveiled by findings from law firm RPC.5 As such, TPLF is shaping the foundation of a lucrative alternative asset class, with average returns surpassing those of real estate and private equity.

Demonstrating the reach and influence of this shift on the continental legal landscape, the European Litigation Funders Association (ELFA) was established in June 2022 to champion the interests of the industry.6 Marcel Wegmüller, one of ELFA's co-founders, elucidates, "ELFA aims to be the primary and trusted resource in the EU for information, research, commentary and inquiries concerning dispute funding and commercial legal finance."

Insurers are responding by increasing premiums, limiting coverage or discontinuing select lines to offset escalating claims costs. However, they should also invest in proactive defence case management, harnessing technology and legal expertise to handle claims.

To pre-empt the surge of the claims culture, insurers need innovative solutions that optimise their operations in a challenging climate. By prioritising data-driven decision-making and developing early-warning systems that employ horizon scanning and analytics to identify social inflation trends, providers can shield themselves against social inflation. This approach not only safeguards profitability but also secures the long-term sustainability of their business.

The Role of Analytics

Claims data within insurance companies is now being re-framed as a pivotal asset, underpinned by the global insurance analytics market projected to reach USD 39 Billion by 2030.7 The use of analytics in insurance is established. Still, the ability to effectively weave these capabilities into business processes is emerging as a key differentiator – and a mark of technical excellence.

Advanced data analytics serves as a tool to monitor and quantify changes in liability driven by social inflation. It enables insurers to more accurately assess and set appropriate reserves, adjust pricing and refine coverage.

Another strategic avenue is developing early-warning systems that draw insights from various sources, encompassing current and prospective lawsuits, competitor liability cases, and social and digital media data. In this arena, Machine Learning (ML) and Artificial Intelligence (AI) can enhance insurers' understanding of liability. When combined with human underwriting expertise, analytics allows insurers to more adeptly identify, comprehend and address the intricate interplay of risks.

Furthermore, insurers can leverage Forward-looking Modelling (FLM), a fusion of historical experience and anticipated future trends. FLM goes beyond traditional predictive models by considering underlying factors and triggers that influence exposure and claims, incorporating horizon scanning to identify potential trends, creating hypothetical scenarios and calibrating processes based on cause and effect. Collaboration among underwriters, claims managers, actuaries, lawyers, scientists and relevant professionals, amalgamating their expertise to generate and scrutinise model outputs, yields invaluable insights.

The Risks and Opportunities of Generative AI in Insurance

Technological innovation has the potential to re-shape the insurance sector, and the emergence of Generative AI (Gen AI) is one of the most exciting advancements. Insurers stand to gain from AI, which can contribute up to USD 15.7 Trillion to the global economy in 2030.8

For insurers, contextualising Gen AI, including the specific language, terminology and nuances intrinsic to insurance, can help achieve relevant business outcomes, enhance accuracy and tackle industry-specific challenges. Specifically, Gen AI can identify social inflation trends in historical and incoming claims, paving the way for streamlined pricing and reserving, along with implementing a robust risk mitigation strategy in partnership with stakeholders across underwriting, claims and actuarial functions.

However, alongside the promise of an enhanced understanding of social inflation trends, Gen AI also introduces specific risks concerning its potential to exacerbate social inflation, demanding careful consideration. Tools such as Gen AI-powered chatbots could lower the threshold for litigation, offering easier access to legal guidance and initiation of lawsuits. Doing so could lead to increased lawsuits, as already seen with TPLF. Building on the implications for analytics, analysing past case law with Gen AI tools can determine the likelihood of successful settlements, potentially favouring plaintiffs. AI chatbots can also help investors in litigation funding make informed decisions.

For the insurance industry, embracing the prowess of contextualised models and analytics holds heightened significance. This empowers the ability to comprehend and convey potential catalysts for significant claims to underwriters and claims handlers, thus playing a crucial role in mitigating the effects of gradual social inflation.

To learn how WNS can help your insurance business intelligently address the challenge of social inflation, talk to our experts.


  1. Institute for Legal Reform

  2. Swiss Re

  3. Global Legal Post

  4. European Parliament

  5. Bloomberg

  6. European Litigation Funders Association

  7. Straits Research

  8. PwC

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