Social inflation, driven by litigation funding, looms as a global systemic risk.
Recent earnings reports in the insurance industry underscore a looming challenge.
Property and casualty insurer Travelers reported a higher profit in its third quarter ending in September, thanks to a rise in revenue and net written premiums. But its MD&A (management’s discussion and analysis) included a subtle warning from CEO Alan Schnitzer. Comparing risks from social inflation to out-of-control fires, he wrote, “Our financial strength also enables us to manage comfortably through large loss events like the January 2025 California wildfires. When it comes to the loss environment, from weather volatility to the impact of social inflation on casualty lines, no one is better positioned.”
Berkshire Hathaway put forth a less veiled alert with its second-quarter earnings report. Losses and loss adjustment expenses increased 12.5% in the first six months of last year compared to 2024, including some $300 million in losses incurred from the Southern California wildfires. But that’s not all, according to the big insurer’s MD&A: “Casualty claim costs continue to be negatively impacted by unfavorable social inflation trends, including the impacts of jury awards and litigation costs.”
Nearly a half-century since Warren Buffett is believed to have coined the term in his 1977 letter to Berkshire shareholders, social inflation, manifesting itself through “nuclear verdicts” on behalf of consumer and corporate plaintiffs, shows signs of becoming a systemic risk. Industry research indicates that insurers are confronting not a cyclical problem, but a structural change, with implications that extend beyond the insurance industry into corporate balance sheets, institutional portfolios, and the stability of liability markets worldwide.
The US is the global epicenter of this shift, but social inflation is emerging in other regions, too, as legal norms, litigation financing, and consumer expectations change.
Back when Buffett first raised the issue, he estimated that the cost of insurance claims from Berkshire Hathaway-owned issuers were rising nearly 1% per month at that time, because of monetary inflation and social inflation, which he defined as the “broadening definition by society and juries of what is covered by insurance policies.”
There is no contemporary comparison to Buffett’s original estimate, but Swiss Re research suggests that social inflation alone contributed about 7% annually to US liability claims growth in 2023. A new study by Insurance Information Institute (III) in conjunction with Casualty Actuarial Society finds that from 2015 to 2024, social inflation contributed between $231 billion and $281 billion in liability insurance losses and related expenses, over and above what economic inflation would predict.
Reinsurance Impacts
Reinsurer Munich Re has called social inflation a headwind to the insurance and reinsurance business but also to the broader economy. Corporations could face larger payouts or higher insurance premiums. For institutional investors holding corporate debt or equity, this could erode profitability, reduce dividends, or weaken creditworthiness.
“Those cost burdens have impacts, not only to the broader business world but to the individual consumers,” observes Josh Hackett, head of Casualty, Munich Reinsurance America. “Those real increases of expenses can make operating the business more difficult. It can lead to reductions in resources or discouragement from taking risk or a general stifling of innovation.”
Social inflation has “impacted loss costs” significantly in the commercial-liability market, Munich Re company warns, meaning insurers—and by extension, reinsurers—may face worsening loss ratios and increased financial strain. Claims inflation is affecting many reinsurance segments, encompassing not just new losses but long-tail liability where results can emerge years after policies are issued.
Other major providers agree. Social inflation, as well as “legal system abuse,” pose a threat to long-term sustainability of liability insurance coverage, Liberty Mutual Insurance argues, and will require more sophisticated risk management, underwriting discipline, and analysis.
“Unlike general inflation, these pressures are driven by unpredictable factors such as outsized jury awards, lengthening legal timelines, rollbacks of tort reforms, and the rapid growth of third-party litigation funding,” warns Wesley Hyatt, global chief client officer, Global Risk Solutions, at Liberty Mutual. It’s complicated, she adds; third-party litigation funding—where investment firms bankroll plaintiffs in exchange for a cut of any settlement or judgment—may cut across local jurisdictions and can manifest differently in different locations.
Helping propel the trend is attorney advertising, says Sean Kevelighan, CEO of the III: “More and more, society is now prompted by large amounts of advertising and things like that, to go to litigation as the first resort rather than the last.”
Litigation as a Financial Product
Social inflation has helped transform third-party litigation funding from a niche into a multi-billion-dollar global industry. According to AM Best, reported ROIs for third-party litigation funders have reached as high as 25%. The asset class has attracted institutional capital from pension funds, hedge funds, and sovereign wealth entities worldwide.
“We think the industry itself is quite nascent,” says David Perla, vice chair of Burford Capital, the world’s largest publicly traded litigation finance firm. “It’s quite a small industry relative to other parts of the financial sector. If you were to compare us to, for instance, private credit, we’re a fraction of the size of the private credit market before we even get to fixed income, or private equity, or public equities.”
Yet, the business is expanding aggressively across jurisdictions. Burford, which trades on the New York and London stock exchanges, has established significant operations in major commercial centers including London, New York, Chicago, Singapore, and increasingly in Korea, Spain, Germany, and Switzerland.
The appeal to consumers, but also to companies that believe themselves to have been injured, is straightforward, according to Perla: “The CFO always thinks it’s very, very expensive [to sue]. I’d like to lower my cost of running my legal department.”
Litigation is thought to be dilutive compared to other expenditures, he notes. “If you pay for an M&A deal, you own a company at the end of it. If you pay for a contract, you have a relationship at the end of it. Litigation is usually you’ve been harmed, and you’re just trying to get some amount back.”
Litigation finance firms like Burford instead frame third-party litigation as a value proposition.
“Problem one, I don’t want to spend as much money as I’m spending,” he says. “Problem two, if I have a good case and it’s advancing, or I’ve won a case but it’s being appealed, then when I win, all I have is a piece of paper. I may want to turn that into dollars or pounds or yen.” For long-running cases—particularly antitrust matters that can stretch into years—the ability to monetize legal assets before final resolution can address that balance sheet concern.
The industry’s growth strategy targets sectors known for litigation intensity: healthcare, retail, consumer packaged goods, hospitality, food and beverage, pharmaceuticals, and technology.
A recent Allianz Commercial report links the rise in huge judgments—from $10 million to more than $100 million—to third-party litigation funding, warning that the surge in “nuclear verdicts has significantly altered the risk landscape for insurers.”
Litigation funding is becoming entrenched in the EU, says Joerg Ahrens, global head of Key Case Management Long Tail at Allianz Commercial.
“Litigation funding plays a crucial role in the EU Collective Redress Directive by providing financial support to ‘qualified entities’ that bring representative actions on behalf of consumers,” he notes. “These entities are required to disclose their financial capacity and the source of their funding to the courts.”
Allianz would like to see standardized disclosure requirements, which he believes could enhance transparency, change dynamics in legal procedures by ensuring fair practices across jurisdictions, and protect litigants from potential conflicts of interest.
Winning Cases
Robert Tyson, founding partner of insurance defense firm Tyson & Mendes, has spent more than three decades defending high-stakes personal injury product liability and other such cases. The number and size of cases have grown, he says, and strategies and tactics used by plaintiffs’ attorneys have become more obvious, down to the words used to incite juror anger as well as arguing cases in places known for very high verdicts.
“Nuclear verdicts are getting worse every day, every year,” says Tyson. “But the good news is you can stop that. … All you have to do is look at the patterns, look at the data, and then change the way you’re doing things.” Among the changes Tyson suggests, humanize the defendant or insurance company and work to diffuse juror anger to mitigate the impact of high-damage awards.
As social inflation reshapes liability risk, those courtroom lessons are increasingly being applied across underwriting, pricing, and corporate risk strategy.
