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Composite insurance inflation continues to outpace general inflation

Willis Towers Watson Claim Cost Index

Insurance Consulting and Technology
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By Jeremy P. Pecora and Emily M. Dobring | September 28, 2021

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

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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.

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 outpaces the general inflation rate for each year since 2013 excluding 2018. The 2021 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, 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).

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 2020, the individual indices for hospital services, medicinal drugs, and auto body work have exceeded the CPI for all items, as shown in Figure 2. For this same 10-year period, the physicians services and legal costs indices trails the CPI for all items. Legal costs are a significant portion of casualty coverages which mitigates the excess inflation trends from the other components.

The average annual trends for several major coverages (from the five-year periods of 2010 to 2015 and 2015 to 2020, as well as the three-year period of 2017 to 2020) are shown in Figure 3. As the figure illustrates, most periods show insurance coverage increases above the CPI. From 2010 to 2015, seven of eight coverages are above the CPI, with all eight larger than the CPI for the 2015 to 2020 period, and seven of eight above the CPI for the 2017 to 2020 period. In the latest three-year period, the largest increase was for auto bodily Injury, averaging 3.35%, while the lowest growth rate was for commercial multiperil, at 1.82%.

We have made no explicit changes to these estimated 2021 trends to reflect any effects of the coronavirus (COVID-19) pandemic on economic and legal activity.

The Willis Towers Watson Claim Cost Index does not measure changes in the frequency of claims or “social” inflation, which reflects 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.

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Figure 1. US claim cost indices
(1982 – 1984 = 100)
*2021 figures are preliminary
Coverage 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021*
Auto, bodily injury -4.65% 4.52% 3.93% 2.73% 3.48% 3.32% 5.30% 3.21% 3.69% 2.26% 4.12% 2.98%
Auto, property damage -1.21% 3.00% 2.01% 1.90% 2.62% 2.37% 3.33% 2.09% 3.02% 2.78% 3.42% 2.98%
Auto, physical damage 1.74% 1.94% 0.37% 1.18% 1.93% 1.63% 1.88% 1.10% 2.29% 3.28% 2.76% 3.96%
Auto, subtotal -1.45% 3.55% 1.85% 2.14% 3.08% 2.38% 4.07% 2.02% 3.10% 2.60% 3.56% 3.08%
Workers compensation -2.88% 3.29% 3.21% 2.33% 3.60% 3.01% 4.69% 3.45% 2.44% 2.04% 4.51% 3.80%
Other, bodily injury -3.60% 4.25% 2.73% 2.81% 2.22% 5.59% 3.98% 4.55% 0.98% 4.52% 3.35% 2.86%
Other, property damage -1.38% 3.10% 3.64% 2.22% 3.38% -0.05% 3.14% 1.49% 5.27% 1.07% 3.36% 3.09%
Burglary and theft 1.15% -1.98% 2.76% 3.68% 4.33% -0.39% 0.01% 7.19% 4.94% -3.14% 3.01% 4.05%
Boiler and machinery 6.79% 3.83% -0.74% 5.14% 1.75% -0.39% -9.16% 5.48% 3.80% 9.25% 3.97% 2.32%
Fire 6.15% 0.68% -0.73% 2.44% 2.45% 3.36% 3.15% 1.70% -0.54% 0.40% 4.29% 2.83%
Allied lines 9.15% -1.20% -0.91% 1.30% 6.21% -1.14% 6.13% 0.33% -0.90% 1.88% 4.70% 2.82%
Homeowners -0.55% -0.18% 1.67% 4.84% 4.73% 4.22% 3.85% 3.00% 2.29% 3.15% 2.08% 1.58%
Commercial multiple peril 2.60% 2.27% 0.65% 2.56% 3.20% 2.25% 3.41% 1.42% 1.75% -0.11% 3.87% 2.48%
Inland marine 1.42% 2.47% 1.50% 0.87% 2.79% 3.62% 1.60% 1.72% 1.97% 5.30% 3.57% 3.45%
Composite -0.05% 2.50% 1.20% 3.19% 4.05% 2.49% 4.11% 2.22% 1.93% 2.34% 3.88% 1.62%
CPI, all items 1.64% 3.16% 2.07% 1.46% 1.62% 0.12% 1.26% 2.13% 2.44% 1.81% 1.23% 1.36%
Figure 2. Decennial Increases
(1982 – 1984 = 100)
Cost for: 2010 2019 2020 Change 2019/2020 Change 2010/2020
CPI, all items 218.1 255.7 258.8 1.23% 18.69%
CPI, physicians services 331.3 383.2 389.9 1.74% 17.68%
CPI, hospital services 601.9 897.5 935.0 4.17% 55.33%
CPI, medicinal drugs 102.3124.8 125.6 0.63% 22.77%
Legal costs 332.3 376.4 385.1 2.33% 15.90%
CPI, auto body work 254.4 313.5 324.7 3.58% 27.63%
Figure 3. Average Increase
(1982 – 1984 = 100)
Coverage Five-year increase
2010 – 2015
Five-year increase
2015 – 2020
Three-year increase
2017 – 2020
CPI, all items 1.68% 1.77% 1.83%
Auto, bodily injury 3.60% 3.71% 3.35%
Auto, property damage 2.38% 2.93% 3.07%
Auto, physical damage 1.41% 2.26% 2.78%
Workers compensation 3.09% 3.42% 2.99%
Other bodily injury 3.51% 3.47% 2.94%
Other property damage 2.45% 2.86% 3.22%
Homeowners 3.04% 2.87% 2.51%
Commercial, multiperil 2.18% 2.06% 1.82%


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