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

Analysis of the annual U.S.-based changes in the Towers Watson Claim Cost Index, as illustrated in Figure 1, shows that the 2011 inflation rate exceeded the general inflation rate for less than half of coverages studied. The 2012 cost increases are preliminary, as certain of the cost indices contributing to the Towers Watson Claim Cost Index have not been finalized. As Figure 2 shows, hospital services again experienced a large increase in 2011 over the general inflation rate. The cost for physician services increased in 2011, and rate of change was slightly less than the general inflation rate.

A P&C insurer's claim settlements are directly affected by economic factors such as price, salary 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 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 2011, the individual indices for hospital services and legal costs have significantly 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 in excess of the general inflation level. During the same period, the cost indices for physician services and auto body work slightly exceeded the general CPI.

The average annual trends for several major coverages (from the five-year periods of 2001 to 2006 and 2006 to 2011, as well as the three-year period of 2008 to 2011) are shown in Figure 3. As the figure illustrates, most periods show insurance coverage increases above the CPI. From 2001 to 2006, all coverages are above the CPI, with seven of eight larger than the CPI for the 2006 – 2011 period, and seven of eight larger for the 2008 – 2011 period. In the latest three-year period, the largest increase was for workers compensation, averaging just above 4.5%, while there was a loss for homeowners, at just above –1%.

The 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.

Click to enlarge
Figure 1. U.S. claim cost indices (click to enlarge)

Figure 2. Decennial increases

Figure 3. Average increase — U.S. claim cost indices

The Tradition Continues

Towers Watson Publishes Trusted Index

As part of Towers Watson's continuing commitment to the property liability insurance industry, we are publishing the Masterson Index under the rebranded name, Towers Watson Claim Cost 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.

Authors

 

Jeremy P. Pecora

Jeremy P. Pecora
Specializes in risk consulting and software.
Towers Watson, Detroit


Emily M. Thompson

Emily M. Thompson
Specializes in risk consulting and software.
Towers Watson, Detroit