Social inflation increases parameter risk around several key variables which, in turn, adds more uncertainty to underwriting. At present, (re)insurance underwriters are attempting to reduce the uncertainty and volatility associated with social inflation, in order to improve their understanding of the ultimate exposure when accepting and pricing risk.

In a reinsurance transaction, structure and terms are primary considerations for a reinsurance underwriter. It has become apparent in the market that capacity for non-proportional or excess of loss reinsurance structures is less readily available, due to the increased leverage ceded to the reinsurer because of uncertainty in ultimate loss for risks most exposed to social inflation. In contrast, the proportional sharing of risk and premium in a quota share placement better balances the risk and return and aligns interests between the insurer and reinsurer. Understandably then, when considering uncertainty associated with social inflation trends, the inclination of the reinsurance market and Munich Re is to have a larger appetite for proportional over non-proportional structures when underwriting commercial liability.

While the social inflation problem appears to exist across most risk classes, re-underwriting the portfolio, limits management, and pricing actions are options available to insurers to control risk. Insurers must also look at external factors, become more forward-thinking in terms of trends, and identify macro factors that can influence underwriting strategy. They can benefit from working with analytics professionals and data scientists who are skilled at data mining and interpreting correlations between data from new sources and market performance. Such collaboration with business partners in this regard can be an efficient and effective strategy for insurance companies to compete and improve results.