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Social inflation: a contemporary insurance buzzword or cause for concern?

28 July 2021 Deanne Wood, Fasken Partner | Insurance Law Practice | Financial Services, Emma Alimohammadi Fasken Associate, Giscard Kotelo Fasken Candidate Attorney
Deanne Wood, Partner | Insurance Law Practice | Financial Services at Fasken

Deanne Wood, Partner | Insurance Law Practice | Financial Services at Fasken

Emma Alimohammadi, Associate at Fasken

Emma Alimohammadi, Associate at Fasken

Giscard Kotelo, Candidate Attorney at Fasken

Giscard Kotelo, Candidate Attorney at Fasken

Although social inflation has been referred to as a contemporary insurance buzzword, the phenomenon has had far-reaching consequences on the global insurance market in the past few years.

The South African insurance industry, which boasts the largest and most established insurance market on the African continent, has not been immune to the consequences of social inflation.

But what is social inflation?

Social inflation is an emerging phenomenon which is described as an increase in insurance costs caused by several factors such as plaintiff-friendly judgments, developments in the law and policy, litigation funding and the public sentiment. The recent South African jurisprudence relating to Covid-19 business interruption claims demonstrating consumer-centric outcomes serves as a clear example of active social inflation in South Africa.

What are the consequences of social inflation on the insurance market?

• Insurance premiums may no longer adequately compensate insurers for the risks that they assume. Therefore, in order to maintain liquidity and profitability, insurers will increase the cost of premiums in an effort to balance an increase in payouts towards insurance claims.
• In the event of an increase in premiums, less people may be able to afford insurance cover. This would have devastating financial implications for the uninsured due to the inability to carry the risk of loss or damage themselves and an increase in debt in order to make good on loss or damage.
• Limitations of cover due to the introduction of further policy exclusions. One such policy exclusion already impacting on South African policyholders is the limitation of extended business interruption cover relating to contagious and infectious disease.

What are the possible solutions to combating social inflation?

Social inflation, if addressed by insurers in a dynamic and proactive manner, may present insurers with an opportunity to engage in public-policy debate, thus promoting legislative changes to level the playing field between plaintiffs and defendants. Further, it serves as a push for much needed technological advances in the insurance market, such as the development of innovative insurance products. These products must be modelled on risk identification and mitigation in order to ensure that premium costs are maintained and that inclusionary insurance is achieved.

By adopting an innovative approach, insurers may be able to combat the adverse impacts of social inflation on the insurance market.

 

Quick Polls

QUESTION

South Africa’s Financial Sector Conduct Authority (FSCA) has the power to raise revenues by issuing administrative penalties and fines against non-compliant financial services providers, with this money flowing back to the Treasury… Does this, in your view, create a regulatory / government conflict of interest?

ANSWER

Absolutely, as conflicted as it gets
Maybe, I’m on the fence on this
No, the FSCA can do no wrong
The guilty must pay
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