U.S. Auto Insurer Claim Payouts Soar Due to Increasing Inflation

Liability insurance covers what the policyholder is legally obligated to pay because of bodily injury or property damage caused to another person or persons. Every U.S. state except New Hampshire requires its drivers to purchase a personal auto insurance policy, with mandatory minimum liability coverage, as a condition of operating a motor vehicle. Small businesses and corporations commonly buy commercial auto insurance liability policies 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 stable inflation rates.

The study measures economic inflation as the Consumer Price Index (CPI)—All Urban metric, a U.S. Bureau of Labor Statistics benchmark. In contrast, social inflation indicates how insurers’ claim payouts exceed the CPI.

The study stated that the personal auto liability insurance business 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. 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.

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 Accident Year 2020, standardized losses rose 15 percent while standardized premiums fell 13 percent
• 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 was a primary influence on these losses before 2021
• The average size of loss—claim severity—has increased dramatically since 2020

“Social inflation was the main source of increasing inflation before 2021 for both personal and commercial auto liability lines. For 2021 and later, increasing inflation came from economic and social inflation,” the study said.

Source: Insurance Information Institute