U.S. commercial auto insurance liability claim payouts swelled $30 billion more than anticipated between 2012-2021 due in part to social inflation, suggests a paper by the Insurance Information Institute (Triple-I), in partnership with the Casualty Actuarial Society (CAS).
The Triple-I/CAS paper, Social Inflation and Loss Development – An Update, authored by James Lynch and David Moore, builds upon previous work that examined changes in loss development.
Brian Fannin, ACAS, CSPA, CAS Research Actuary, commented, “The original paper presented a novel, yet straightforward technique that may be used to flag some of the macroeconomic influences on liability lines in the industry. It also illustrated that the recent past has experienced a sizeable upward movement in company liabilities.
“This update shows that the dynamism in the tort landscape continues and is likely more sizable than previously estimated. The authors identify further avenues of inquiry to better understand what mechanisms are underway.”
The paper examined trends in the loss development patterns regularly used by actuaries to then estimate an insurer’s future liabilities.
Triple-I explains that loss development refers to the changes in paid and case-incurred loss amounts as claims move from initial report to closure.
Actuaries monitor these patterns by looking at a statistic known as the loss development factor, or LDF.
To discern annual trends, the paper analysed the LDFs by calendar year, rather than by more common methods such as accident year or policy year.
According to Triple-I, by 2019, these factors had been increasing for U.S. commercial auto insurers for more than a decade.
The updated paper indicated that LDFs in 2020 and 2021 were lower than in 2018-2019, which is likely a result of the pandemic, though they remained considerably higher than at the beginning of the 2010s.
This continued presence of high LDFs “Is evidence that a certain level of social inflation remains baked into industry results, even in 2020 and 2021 with the pandemic’s influence,” states the Triple-I/CAS paper.
The updated paper also noted that general inflation is likely to contribute to additional increases in the size of claims.
