Analysis of the annual changes in the WTW Claim Cost Index, as illustrated in Figure 1, shows that the general inflation rate outpaces the composite insurance inflation rate in 2022, but the composite insurance inflation rate has risen from the prior preliminary estimates. The 2023 cost increases are preliminary, as many of the cost indices contributing to the WTW Claim Cost Index have not been finalized, but early indications show that the composite insurance inflation rate has exceeded the general inflation rate. We expect continued increases in the cost of claims as inflation in product prices manifest into insurance costs over the next year.
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 WTW 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 2022, the individual indices for hospital services 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, medicinal drugs, and legal costs indices trail the CPI for all items. Legal costs are a significant portion of casualty coverages, and match the overall 10-year period inflation rate. Please note that legal costs slightly exceed the overall inflation rate in the last year (2021/2022).
The average annual trends for several major coverages (from the five-year periods of 2012 to 2017 and 2017 to 2022, as well as the three-year period of 2019 to 2022) are shown in Figure 3. As the figure illustrates, most periods show insurance coverage increases above the CPI. From 2012 to 2017, all eight coverages are above the CPI. Six of eight coverages are larger than the CPI for the 2017 to 2022 period, and three of eight coverages are above the CPI in the 2019 to 2022 period. In the latest three-year period, the largest increase was for commercial multiperil, averaging 5.76%, while the lowest growth rate was for other bodily injury, at 3.95%.
We have made no explicit changes to these estimated trends to reflect any effects of COVID-19 on economic and legal activity.
