TY  - GEN
AB  - I study the pricing of a novel source of aggregate risk to the insurance sector: shifts in insurers’ loss distribution due to extreme jury verdicts and settlements, widely referred to as ``social inflation" by insurers and regulators. A hedonic model shows that jury verdicts for accidents with identical characteristics have increased persistently since 2015, which insurers attribute to evolving social norms and legal tactics. Insurers face not only higher expected losses but also heightened uncertainty, due to both higher loss variability and uncertainty about loss distribution parameters. I then study the insurers' price response to social inflation, focusing on the auto insurance market. Leveraging within insurer-year variation across product lines and across geography, I find that social inflation accounts for nearly two thirds of the annual price increase since 2018. A model shows that this large price response includes a risk compensation due to the interaction of financial frictions with uncertainty in the loss distribution. Consistent with risk compensation in insurers' price response, I find (i) bigger hikes for more constrained insurers, (ii) higher insurer profitability, and (iii) increased risk margin in loss reserves. Overall, my findings highlight how changing social norms and legal developments translate into a source of aggregate risk for the insurance sector. Uncertainty induced by the shifting loss distribution is priced by insurers, a finding that is relevant to emerging risks such as climate and cyber.
AD  - University of Chicago
AU  - Oh, Sangmin
DA  - 2024-06
DO  - 10.6082/uchicago.12369
DO  - doi
ED  - Ralph Koijen
ED  - Niels Gormsen
ED  - Lars Hansen
ED  - Stefan Nagel
ID  - 12369
KW  - Finance
KW  - Financial Frictions
KW  - Jury Verdicts
KW  - Liability Insurance
KW  - Social Inflation
KW  - Social Norms
L1  - https://knowledge.uchicago.edu/record/12369/files/Oh_uchicago_0330D_17402.pdf
L2  - https://knowledge.uchicago.edu/record/12369/files/Oh_uchicago_0330D_17402.pdf
L4  - https://knowledge.uchicago.edu/record/12369/files/Oh_uchicago_0330D_17402.pdf
LA  - eng
LK  - https://knowledge.uchicago.edu/record/12369/files/Oh_uchicago_0330D_17402.pdf
N2  - I study the pricing of a novel source of aggregate risk to the insurance sector: shifts in insurers’ loss distribution due to extreme jury verdicts and settlements, widely referred to as ``social inflation" by insurers and regulators. A hedonic model shows that jury verdicts for accidents with identical characteristics have increased persistently since 2015, which insurers attribute to evolving social norms and legal tactics. Insurers face not only higher expected losses but also heightened uncertainty, due to both higher loss variability and uncertainty about loss distribution parameters. I then study the insurers' price response to social inflation, focusing on the auto insurance market. Leveraging within insurer-year variation across product lines and across geography, I find that social inflation accounts for nearly two thirds of the annual price increase since 2018. A model shows that this large price response includes a risk compensation due to the interaction of financial frictions with uncertainty in the loss distribution. Consistent with risk compensation in insurers' price response, I find (i) bigger hikes for more constrained insurers, (ii) higher insurer profitability, and (iii) increased risk margin in loss reserves. Overall, my findings highlight how changing social norms and legal developments translate into a source of aggregate risk for the insurance sector. Uncertainty induced by the shifting loss distribution is priced by insurers, a finding that is relevant to emerging risks such as climate and cyber.
PB  - University of Chicago
PY  - 2024-06
T1  - Social Inflation
TI  - Social Inflation
UR  - https://knowledge.uchicago.edu/record/12369/files/Oh_uchicago_0330D_17402.pdf
Y1  - 2024-06
ER  -