The surge in lawsuit amounts is forcing Swiss Re to significantly increase reserves in its American liability business. This move has rendered the company’s profit target for 2024 obsolete, but shareholders are celebrating nonetheless.
Rising Costs in the Insurance Industry
- In the United States, liability cases cost insurers $143 billion last year, a third more than damages from natural disasters like hurricanes.
- Swiss Re is boosting reserves in its American liability business by $2.4 billion, bringing total reserves for the year to $3.1 billion.
- The company is also implementing an uncertainty surcharge in new business to prepare for potential liabilities.
Impact on Annual Profit
- CEO Andreas Berger mentioned a comprehensive review of reserves in property and liability sectors, considering the latest industry data and legal trends.
- With the recent adjustments, reserves are now at the upper end of the best estimate range.
- As a result, Swiss Re has revised its profit targets downwards. The third quarter is expected to end just slightly in the positive, with an annual profit projection of over $3 billion instead of the initial $3.6 billion.
Record High Stock Price
- Despite the profit adjustment, investors reacted enthusiastically to the news, causing Swiss Re’s stock price to soar by over 9%, reaching its highest level in 22 years.
- Shareholders had likely anticipated more significant adjustments in reserves, given the market preparation by previous CEO Christian Mumenthaler.
Continued Rise in Social Inflation
- The insurance industry faces bleak prospects as social inflation, the unexplained portion of inflation, shows no signs of abating.
- Swiss Re’s study from September reveals that social inflation is currently in its third upswing phase, driven by mega verdicts and increased compensations for non-economic damages.
- The phenomenon may spread to Europe in the coming years, fueled by new regulations in product liability and easier access to funding sources for claimants.
Potential Impact in Europe
- The study suggests that the legal industry has evolved with sophisticated strategies to influence juries against defendants.
- Last year, Swiss Re’s social inflation index reached a 20-year high of 7%, with new avenues for lawsuits against companies emerging.
- The trend, primarily observed in the US, is expected to expand to Europe in the near future, posing challenges for businesses across the continent.
In conclusion, Swiss Re’s decision to bolster reserves in the face of escalating lawsuit costs reflects the broader challenges faced by the insurance industry. While shareholders may rejoice in the short term, the long-term implications of social inflation and increased litigation present significant hurdles for insurers globally.
FAQ
What is social inflation?
- Social inflation refers to the portion of inflation in the insurance industry that cannot be explained by economic factors. It often arises from societal trends, legal developments, and jury biases that lead to higher claim costs.
How does social inflation impact insurers?
- Social inflation can result in increased litigation costs, higher settlements and verdicts, and greater uncertainty in estimating reserves. Insurers may need to adjust premiums and reserves to account for these rising costs.