New Joint CAS and Triple-I Report: Increasing Economic and Social Inflation Continue to Influence Costs

A new study by the Casualty Actuarial Society (CAS) and Insurance Information Institute (Triple-I) examines the impact of combined social and economic inflation on auto liability insurance, revealing significant increases in losses driven primarily by rising claim severity. Using actuarial methods such as loss development factors and industry-wide data analysis, the paper highlights how inflationary pressures have intensified from 2014 to 2023, necessitating adjustments in insurance pricing and risk management.

The report, Increasing Inflation on Auto Liability Insurance – Impact as of Year-End 2023, highlights that inflation's effects are not solely due to economic factors. Social inflation, which encompasses litigation trends and practices that inflate claims costs, has also significantly influenced losses. These practices contribute to longer settlement times and higher legal expenses, complicating efforts to maintain underwriting profitability.

Between 2014 and 2023, the study found that inflation contributed to an increase in auto liability losses and defense and cost containment (DCC) expenses by $118.9 billion to $137.2 billion, representing 9.9% to 11.5% of the total $1.2 trillion in net losses.

For commercial auto liability, the report shows that losses and DCC expenses rose by $42.7 billion to $55.8 billion, significantly higher than the previous range of $35 billion to $44 billion. Despite a drop in claim frequency, the severity of claims surged by 78% from 2014 to 2023, compared to a 29% rise in the Consumer Price Index, indicating that insurers face inflationary challenges beyond general economic trends.

Personal auto liability also experienced significant impacts, with increasing inflation driving losses and DCC up by a range of $76.3 billion to $81.3 billion, significantly higher than the previous estimate of $61 billion. Claim frequency remains below pre-pandemic levels. Severity continues to rise, with the compound growth rate nearly tripling from 3.6% between 2014 and 2019 to 9.8% from 2020 to 2023.

The paper recommends that insurers continue to adapt to the ongoing inflationary environment by closely monitoring trends in claim severity and incorporating inflation-adjusted metrics into pricing and reserve practices.

The full paper can be accessed on the CAS website.
 

The CAS would like to thank the following reviewers of the paper:

Brian Brown, FCAS
Morgan Bugbee, FCAS, CSPA
Daniel Fernandez, FCAS
Kara Kemsley, FCAS
Katie Pipkorn, FCAS