Social inflation refers to steeply rising insurance rates due to social factors such as large jury awards and broader definitions of liability. This paper is the first to study the risk of social inflation and its economic consequences. Using a novel, hand-matched dataset that spans verdicts, financial statements, and insurance rate filings for commercial auto liability, I find that the number of verdicts and settlements exceeding $50 million has increased almost threefold from 2011 to 2019. To highlight the role of nuclear awards in insurance pricing, I build a model of social inflation and show that social inflation risk has a “double kick” effect on insurance price through increased effective marginal cost and heightened required reserves. I then use both a case study and a triple-difference framework to illustrate the causal impact of social inflation risk on insurance rates. Finally, I discuss implications for insurers during the COVID-19 pandemic facing social inflation: the risk of retroactive modification and extended interpretation of existing insurance policies. Ultimately, I uncover an important new source of aggregate risk that affects the stability of the insurance sector and the economic activities that depend on it. 

Keywords: social inflation, litigation, nuclear verdicts, jury awards, property and casualty insurance, insurance regulation, financial stability​