U.S. personal and commercial auto insurer liability claim payouts combined were $96 billion to $105 billion higher between 2013 and 2022 because of social and economic inflation, according to a news release from the Insurance Information Institute (Triple-I).
“For personal auto liability insurance, increasing inflation drove loss and DCC (defense containment costs) higher by $61 billion,” according to Triple-I's study, Impact of Increasing Inflation on Personal and Commercial Auto Liability Insurance. “For the same period (2013-2022), increasing inflation drove commercial auto liability loss and DCC higher by $35 billion to $44 billion.”
Liability insurance covers what the policyholder is legally obligated to pay because of bodily injury or property damage. Every state except New Hampshire requires its drivers to carry a personal auto insurance policy, with mandatory minimum amounts of liability coverage, to operate a vehicle. Commercial auto insurance liability policies are commonly bought by small businesses and corporations to cover trucks and other vehicles used for commercial purposes, such as limousines and taxis.
The study was researched and written by Jim Lynch, FCAS, MAAA, Triple-I’s former chief actuary; Dave Moore, FCAS, MAAA, president, Moore Actuarial Consulting LLC; and Dale Porfilio, FCAS, MAAA, Triple-I’s chief insurance officer. The research methodology compares the latest loss development patterns to a baseline assumption without social inflation and with stable inflation rates.
Economic inflation is measured in the study as the Consumer Price Index (CPI), a U.S. Bureau of Labor Statistics benchmark, whereas social inflation indicates how insurer claim payouts exceed the CPI.
“The business of personal auto liability insurance is also many times larger than commercial auto. Personal auto liability had $152.6 billion in net earned premiums in 2022, four times as much as commercial auto liability,” the study said. Yet personal auto policyholders typically have $100,000 or less in liability coverage, while a typical commercial policyholder has a coverage limit of $1 million, the study explained.
Supported by detailed analyses of claims payouts dating back years, the study concluded that, for personal auto liability insurers:
- Losses have been growing faster than premiums in recent years
- Since 2020, standardized losses rose 15% while standardized premium fell 13%
- Severity, the size of losses, increased dramatically after 2019
The study concluded that commercial auto liability insurers saw:
- Losses grow faster than the overall economy
- Social inflation as a primary influence on these losses prior to 2021
- The average size of loss---claim severity---increase dramatically since 2020
“For both personal and commercial auto liability lines, social inflation was the main source of increasing inflation before 2021. For 2021 and later, increasing inflation came from a combination of economic inflation and social inflation,” the study said.