Accounting for Costs.

Medical-cost expenses continued to outpace the general inflation rate, keeping the price indexes for major property/casualty lines above the consumer price index in 1999.

This article is an update of the Masterson Indexes, detailing the annual average cost indexes for property/casualty coverage from 1989 through 1999, plus a forecast for 2000. The indexes are shown on page 77.

A property/casualty insurer's claims settlements are directly affected by economic factors as they relate to price, salary and wages. In economic terms, claim costs for loss and loss adjustment expenses are the production costs for insurers. Insurers' major loss costs include physicians' 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. Loss adjustment expenses are costs incurred by insurance companies in settling claims: lawyers' fees and other legal and court costs.

During the 10 years since 1989, the individual indexes for physician services, hospital services, legal costs and auto bodywork have exceeded the consumer price index. For instance, the index for physician services increased 57.2% in the 10 years ending 1999, to 236.0 from 150.1 in 1989. Likewise, the index for the cost of hospital services increased 83.1%, to 289.5 from 158.1 in 1989. Since these are key components in claim costs for the casualty insurance lines, it follows that those lines have experienced increases in claim costs that are considerably above the general inflation level.

Price increases for property and multiperil have stayed between 2.7% and 4% between 1990 and 1999, with property increases of 2.74% for 1999, though the preliminary estimate for 2000 shows a sharp increase. Liability price increases have gradually decreased from 6% in 1991 to 3.7% in 1995. After remaining flat for the next three years, prices started to increase more rapidly in 1999, up 4.4%, and the 2000 estimate calls for a 4.9% increase.

From 1990 to 1999, the rate of cost increases for physician services has dropped from 7.1% to 2.1% and increases in hospital room cost rates have fallen from 10.9% in 1990 to 3.2% in 1998, before increasing to 4.1% in 1999. Both physician and hospital costs show larger increases in 2000 preliminary figures. The decreases reflect the strong efforts to control the medical treatment costs. However, the effect of the decreases on liability and workers' compensation insurance costs may be reversing, as cost containment runs into natural limitations. This effect also was seen in larger increases in health insurance costs in the last year.

While increases in legal costs were less than 3% from 1992 through 1995, these costs also have shown larger increases: 5% for 1999 and an estimated 5.3% for 2000.

The general pattern of low average increases in liability costs and flat increases in the property lines are repeated in the individual lines. However, the latest two years are not consistently below the latest five years, indicating that cost inflation may have either flattened or begun to grow.

These indexes do not measure "social" inflation, which encompasses changes in attitudes toward litigation, changes in jury attitudes, new theories of liability and the push toward large settlements given by large punitive damage awards.

William R. Van Ark is a consulting actuary with Tillinghast-Towers Perrin.

Editor's Note 

This article presents an update of a family of price indexes for major business lines written by property and casualty insurers. Originally developed in the 1960s by consulting actuary Norton E. "Doc" Masterson, the "Masterson Indexes" were first published byA.M. Best Co. in 1968. William R. Van Ark is a consulting actuary with Tillinghast-Towers Perrin. Questions or comments regarding the indexes should be directed to him at Tillinghast-Towers Perin 1000 Town Center, Suite 950, Southfield, Mich. 48075-1225. Mr. Van Ark also can be reached at [phone] or by e-mail at [e-mail].

Mr. Van Ark' assistant, Jacob Roe, assisted in the research and calculations involved in updating the Masterson Indexes.