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General inflation finally outpaces composite insurance inflation for the first time since 2012

Willis Towers Watson Claim Cost Index

Insurance Consulting and Technology
Insurer Solutions

By Jeremy P. Pecora and Emily M. Thompson | November 12, 2019

This article updates a family of price indices for major lines of business written by property & casualty (P&C) insurers.

Analysis of the annual changes in the Willis Towers Watson Claim Cost Index, as illustrated in Figure 1, shows that the composite insurance inflation rate has outpaced the general inflation rate each year since 2013, excluding 2018. The 2019 cost increases are preliminary, as many of the cost indices contributing to the Willis Towers Watson Claim Cost Index have not been finalized.

A P&C insurer’s claim settlements are directly affected by economic factors such as trends in the cost to replace damaged property, the cost of repair parts, the cost of medical services and drugs, and salaries and wages. In economic terms, claim costs for loss and loss adjustment expenses are the cost of production for the insurer. An insurer’s major claim costs include physician services and other medical expenses; hospital care and rehabilitation; lost time and wages; automobiles, including repairs and parts; building materials and construction labor; and personal effects. The components for loss adjustment expenses are those incurred by insurance companies in settling claims (e.g., legal fees, and other legal and court costs).

A P&C insurer’s claim settlements are directly affected by economic factors such as trends in the cost to replace damaged property, the cost of repair parts, the cost of medical services and drugs, and salaries and wages.

The Willis Towers Watson Claim Cost Index is calculated from a variety of sources (e.g., the Consumer Price Index [CPI] and the Producer Price Index [PPI]) that reflect insurance costs. The Index can be used as an indicator of the rate of change in claim severity. For example, insurance companies purchase auto mechanic services for auto physical damage coverage. As the hourly wage of auto mechanics increases, the cost for auto physical damage insurance coverage increases.

For the 10-year period ending in 2018, the individual indices for physician services, hospital services and auto body work have exceeded the CPI for all items, as shown in Figure 2. Since these are key components in claim costs for the casualty insurance lines, it follows that these lines have experienced increases in claim costs that are generally in excess of the general inflation level.

Coverage 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019*
Auto, bodily injury 4.57% 4.22% -4.65% 4.52% 3.93% 2.73% 3.48% 3.32% 5.30% 3.21% 3.69% 3.23%
Auto, property damage 3.25% 7.94% -1.21% 3.00% 2.01% 1.90% 2.62% 2.37% 3.33% 2.09% 3.02% 2.76%
Auto, physical damage 2.59% 9.51% 1.74% 1.94% 0.37% 1.18% 1.93% 1.63% 1.88% 1.10% 2.29% 3.20%
Auto, subtotal 3.68% 6.09% -1.45% 3.55% 1.85% 2.14% 3.08% 2.38% 4.07% 2.02% 3.10% 3.05%
Figure 1. U.S. claim cost indices
(1982 – 1984 = 100)
*2019 figures are preliminary
Workers compensation 4.21% 5.32% -2.88% 3.29% 3.21% 2.33% 3.60% 3.01% 4.69% 3.45% 2.44% 2.09%
Other, bodily injury 4.65% 3.05% -3.60% 4.25% 2.73% 2.81% 2.22% 5.59% 3.98% 4.55% 0.98% 3.21%
Other, property damage 2.94% 2.44% -1.38% 3.10% 3.64% 2.22% 3.38% -0.05% 3.14% 1.49% 5.27% 5.05%
Burglary and theft 2.37% 3.63% 1.15% -1.98% 2.76% 3.68% 4.33% -0.39% 0.01% 7.19% 4.94% 4.15%
Boiler and machinery 2.53% -0.93% 6.79% 3.83% 3.83% 5.14% 1.75% -0.39% -9.16% 5.48% 3.80% 3.43%
Fire 3.74% 2.07% 6.15% 0.68% -0.73% 2.44% 2.45% 3.36% 3.15% 1.70% -0.54% 3.93%
Allied lines 3.90% 4.10% 9.15% -1.20% -0.91% 1.30% 6.21% -1.14% 6.13% 0.33% -0.90% 5.62%
Homeowners 3.98% -11.73% -0.55% -0.18% 1.67% 4.84% 4.73% 4.22% 3.85% 3.00% 2.29% 3.22%
Commercial multiple peril 4.15% 3.55% 2.60% 2.27% 0.65% 2.56% 3.20% 2.25% 3.41% 1.42% 1.75% 2.78%
Inland marine 2.42% 1.59% 1.42% 2.47% 1.50% 0.87% 2.79% 3.62% 1.60% 1.72% 1.97% 3.78%
Composite 3.84% 1.36% -0.05% 2.50% 1.20% 3.19% 4.05% 2.49% 4.11% 2.22% 1.93% 3.14%
CPI, all items 3.84% -0.36% 1.64% 3.16% 2.07% 1.46% 1.62% 0.12% 1.26% 2.13% 2.44% 1.91%
Figure 2. Decennial increases
(1982 – 1984 = 100)
Cost for: 2008 2017 2018 Change 2017/2018 Change 2008/2018
CPI, all items 215.3 245.1 251.1 2.44% 16.63%
CPI, physicians services 311.3 380.1 380.5 0.10% 22.20%
CPI, hospital services 522.3 842.8                     880.1 4.42% 68.49%
CPI, medicinal drugs N/A 123.4 124.9 1.18% N/A
Legal costs 323.0 364.5 372.2 2.10% 15.21%
CPI, auto body work 239.7 294.5 302.7 2.81% 26.28%

 

The average annual trends for several major coverages (from the five-year periods of 2008 to 2013 and 2013 to 2018, as well as the three-year period of 2015 to 2018) are shown in Figure 3. As the figure illustrates, most periods show insurance coverage increases above the CPI. From 2008 to 2013, seven of eight coverages are above the CPI, with all eight larger than the CPI for the 2013 to 2018 period, and seven of eight above the CPI for the 2015 to 2018 period. In the latest three-year period, the largest increase was for auto bodily injury, averaging 4.07%, while the lowest growth rate was for auto physical damage, at 1.76%.

In the latest three-year period, the largest insurance coverage increase was for auto bodily injury, averaging 4.07%, while the lowest growth rate was for auto physical damage, at 1.76%.

The Willis Towers Watson Claim Cost Index does not measure changes in the frequency of claims or “social” inflation, such as changes in attitudes toward litigation, changes in jury attitudes, new theories of liability or the push toward larger settlements driven by large punitive damage awards.

Figure 3. Average increase, U.S. claim cost indices
(1982 – 1984 = 100)
Coverage Five-year increase
2008 – 2013
Five-year increase
2013 – 2018
Three-year increase
2015 – 2018
CPI, all items 1.59% 1.51% 1.94%
Auto, bodily injury 2.09% 3.80% 4.07%
Auto, property damage 2.69% 2.68% 2.81%
Auto, physical damage 2.90% 1.77% 1.76%
Workers compensation 2.21% 3.44% 3.52%
Other bodily injury 1.81% 3.45% 3.16%
Other property damage 1.99% 2.63% 3.29%
Homeowners –1.36% 3.61% 3.04%
Commercial, multiperil 2.32% 2.40% 2.19%

The tradition continues

Willis Towers Watson publishes trusted Index

The Index has a long history of excellence. Norton E. “Doc” Masterson created the claim cost index in his seminal work, “Economic Factors in Liability and Property Insurance Claims Costs 1935 – 1967.”

Originally developed in the 1960s by Masterson, a consulting actuary, the index was first published by A.M. Best and Co. in 1968.

Masterson’s index work was taken over by William Van Ark in 1996. Jeremy Pecora has been updating it since 2005.

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Authors

Jeremy P. Pecora

Emily M. Thompson

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