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 2021. The 2022 cost increases are preliminary, as many of the cost indices contributing to the WTW Claim Cost Index have not been finalized. We expect large 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 2021, 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, which mitigates the excess inflation trends from the other components.
The average annual trends for several major coverages (from the five-year periods of 2011 to 2016 and 2016 to 2021, as well as the three-year period of 2018 to 2021) are shown in Figure 3. As the figure illustrates, most periods show insurance coverage increases above the CPI. From 2011 to 2016, all eight coverages are above the CPI. All eight coverages are also larger than the CPI for the 2016 to 2021 and the 2018 to 2021 periods. In the latest three-year period, the largest increase was for other bodily Injury, averaging 4.06%, while the lowest growth rate was for homeowners, at 2.64%.
We have made no explicit changes to these estimated trends to reflect any effects of COVID-19 on economic and legal activity.
The WTW 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. Figure 4 compares composite inflation indices since 2011 to the Consumer Price Index. Both multi-peril and liability composite inflation is higher than the CPI over the last ten years, with property inflation being higher for all years from 2015 to 2022, except for 2018.
| Coverage | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022* | ||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Auto, bodily injury | 2.73% | 3.48% | 3.32% | 5.30% | 3.21% | 3.69% | 2.26% | 4.12% | 3.13% | 3.47% | ||
| Auto, property damage | 1.90% | 2.62% | 2.37% | 3.33% | 2.09% | 3.02% | 2.78% | 3.42% | 4.09% | 5.19% | ||
| Auto, physical damage | 1.18% | 1.93% | 1.63% | 1.88% | 1.10% | 2.29% | 3.28% | 2.76% | 4.83% | 4.05% | ||
| Auto, subtotal | 2.14% | 3.08% | 2.38% | 4.07% | 2.02% | 3.10% | 2.60% | 3.56% | 3.67% | 2.61% | ||
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| Workers compensation | 2.33% | 3.60% | 3.01% | 4.69% | 3.45% | 2.44% | 2.04% | 4.50% | 3.80% | 3.64% | ||
| Other, bodily injury | 2.81% | 2.22% | 5.59% | 3.98% | 4.55% | 0.98% | 4.52% | 3.35% | 4.31% | 3.38% | ||
| Other, property damage | 2.22% | 3.38% | -0.05% | 3.14% | 1.49% | 5.27% | 1.07% | 3.36% | 7.17% | 4.35% | ||
| Burglary and theft | 3.68% | 4.33% | -0.39% | 0.01% | 7.19% | 4.94% | -3.14% | 3.01% | 5.80% | 5.17% | ||
| Boiler and machinery | 5.14% | 1.75% | -0.39% | -9.16% | 5.48% | 3.80% | 9.25% | 3.97% | -0.20% | 1.55% | ||
| Fire | 2.44% | 2.45% | 3.36% | 3.15% | 1.70% | -0.54% | 0.40% | 4.29% | 10.06% | 2.85% | ||
| Allied lines | 1.30% | 6.21% | -1.14% | 6.13% | 0.33% | -0.90% | 1.88% | 4.70% | 10.53% | 3.50% | ||
| Homeowners | 4.84% | 4.73% | 4.22% | 3.85% | 3.00% | 2.29% | 3.15% | 2.08% | 2.71% | 4.23% | ||
| Commercial multiple peril | 2.56% | 3.20% | 2.25% | 3.41% | 1.42% | 1.75% | -0.11% | 3.87% | 7.83% | 2.70% | ||
| Inland marine | 0.87% | 2.79% | 3.62% | 1.60% | 1.72% | 1.97% | 5.30% | 3.57% | 5.62% | 6.32% | ||
| Composite | 3.19% | 4.05% | 2.49% | 4.11% | 2.22% | 1.93% | 2.34% | 3.88% | 3.20% | 3.59% | ||
| CPI, all items | 1.46% | 1.62% | 0.12% | 1.26% | 2.13% | 2.44% | 1.81% | 1.23% | 4.70% | 7.04% |
* 2022 figures are preliminary
| Cost for: | 2011 | 2020 | 2021 | Change 2020 / 2021 |
Change 2011 / 2021 |
|---|---|---|---|---|---|
| CPI, All Items | 224.9 | 258.8 | 271.0 | 4.70% | 20.46% |
| CPI, Physicians Services | 340.3 | 389.9 | 406.5 | 4.26% | 19.46% |
| CPI, Hospital Services | 639.0 | 935.0 | 963.0 | 3.00% | 50.71% |
| CPI, Medicinal Drugs | 105.5 | 125.6 | 123.6 | -1.52% | 17.25% |
| Legal Costs | 335.1 | 385.1 | 393.9 | 2.27% | 17.56% |
| CPI, Auto Body Work | 259.9 | 324.7 | 343.0 | 5.63% | 31.94% |
| Coverage | 5-Year Increase 2011 - 2016 |
5-Year Increase 2016 - 2021 |
3-Year Increase 2018 - 2021 |
1-Year Increase 2020 - 2021 |
|---|---|---|---|---|
| CPI, All Items | 1.31% | 2.46% | 2.57% | 4.70% |
| Auto Bodily Injury | 3.75% | 3.28% | 3.17% | 3.13% |
| Auto Property Damage | 2.44% | 3.08% | 3.43% | 4.09% |
| Auto Physical Damage | 1.40% | 2.85% | 3.62% | 4.83% |
| Workers Comp. | 3.36% | 3.24% | 3.44% | 3.80% |
| Other Bodily Injury | 3.46% | 3.53% | 4.06% | 4.31% |
| Other Property Damage | 2.46% | 3.65% | 3.84% | 7.17% |
| Homeowners | 3.85% | 2.64% | 2.64% | 2.71% |
| Comm. Multiperil | 2.41% | 2.92% | 3.81% | 7.83% |
