Social inflation a major risk in North America for 2025, survey finds

By Mia MacGregor

Feb 19 - (The Insurer) - Social inflation has been identified as a key risk in North America for the year ahead, alongside geopolitical instability and the adoption of AI, according to the latest Global Forecast Report from global law firm Kennedys.

The report, based on a survey of 170 partners conducted between November and December 2024, highlighted growing concerns over social inflation in the U.S. This encompasses rising litigation, expanded liability definitions, plaintiff-friendly court rulings and increasing jury awards.

While social inflation ranked as the third-largest risk in North America, Eric Hiller, U.S. managing partner at Kennedys, suggested it could be the most pressing concern.

“In my view, social inflation could be number one in terms of the nuclear verdicts we’re seeing, and the impact those verdicts have across the board on settlements,” Hiller told The Insurer.

“You see the headlines about nuclear verdicts, but what people don’t realise is that those verdicts create panic throughout the industry, leading to inflated settlement values across the board,” he added.

Hiller said that insurers are increasingly working together to curb some of the effects of social inflation.

“When you have large towers of coverage where insurers share in the risk, historically, there’s been a lot of finger-pointing. That’s a trend that warrants attention, as the industry coming together – rather than falling into the trap of being divided – ultimately benefits insurers rather than policyholders and plaintiffs,” he said.

The report also pointed to legal trends, including increased class actions and litigation funding, as key drivers of rising claims costs.

AI AND CYBER THREATS DOMINATE CONCERNS

Globally, the adoption of AI was identified as the most significant risk for 2025, followed by cyberattacks and system outages, and the impact of extreme weather.

More than 85 percent of respondents cited AI adoption as the event with the greatest potential risk impact over the next five years.

Partners expressed concerns over AI’s rapid evolution, highlighting risks such as data privacy, algorithmic bias, cybersecurity threats and its potential to disrupt traditional business models.

Hiller described much of the concern surrounding AI as stemming from “a fear of the unknown”.

“AI is interesting in the sense that it’s a risk and a concern because there are so many unknowns regarding what types of claim activity or exposures might arise from it,” he said.

“There are some predictable exposures – like in the professional liability space, where attorneys have already relied on AI and essentially committed malpractice due to inaccurate case citations. But there’s also an entire world of unknowns, particularly in the financial sector and other industries where we haven’t necessarily seen concrete examples yet,” he added.

AI-driven cyber threats have also intensified, with criminals increasingly using AI for social engineering, malware development and fraudulent chatbot schemes, the report found.

Cyberattacks and system outages ranked as the second-highest concern globally, particularly in Europe, the Middle East and Africa, where 27% of respondents identified them as their greatest risk.

The report warned that AI has expanded the attack surface for cybercriminals, making insurers, which manage vast amounts of sensitive customer data, prime targets.

A failure to maintain robust cybersecurity measures could result in severe legal, financial and reputational consequences, Kennedys noted.

Extreme weather events were another major concern, particularly in Asia Pacific, where 19% of respondents ranked them as their top risk.

GEOPOLITICAL UNCERTAINTY EMERGES AS MAJOR RISK

When asked to consider which driving force is of increasing concern to the insurance claims landscape, geopolitical instability scored the highest across all regions and significantly so in Asia Pacific, Latin America and the UK.

Similar to AI, Hiller noted that geopolitical tensions present risks largely due to uncertainty.

“While people are aware of global political developments, there’s significant uncertainty around regions like the Middle East and what geopolitical factors mean from an insurance risk and exposure standpoint,” he explained.

Ongoing wars, political upheavals and international conflicts, including tensions in Eastern Europe, the Middle East and the Far East, are driving claims risks, according to the report.

Additionally, the outcome of the 2024 US presidential election is expected to have a significant global impact.

The report stated that shifts in policy and rising costs could undermine business confidence, potentially leading to slower growth, redundancies and insolvencies.

This, in turn, will exacerbate cost-of-living concerns for both consumers and businesses, according to Kennedys.

“When coupled with additional pressure on already stretched supply chains and increase the costs of goods and services; claims inflation remains a live issue,” the report stated.

RECOMMENDATIONS

Kennedys’ report provided several recommendations for insurers and businesses to navigate these evolving risks.

The firm said that prioritising employee training on emerging risks and regulatory changes is crucial, as is reviewing policies to ensure a clear understanding of covered risks.

Additionally, the report noted that staying ahead of legislative and regulatory developments, embracing AI while strengthening fraud detection measures, and reassessing risk modeling practices, policy limits, and deductibles are necessary steps.

Kennedys recommended that businesses adapt commercial strategies in response to government-led changes, consider alternative dispute resolution to manage rising litigation costs, and engage with regulators and policymakers to shape justice reforms.