Setting the pace: the costs of some key components in property/casualty claims are making slower strides in the race against inflation.

Hospital services continued to outpace the general rate of inflation through 2003. However, auto-body repair and legal costs grew at a slower pace than the general rate of inflation, while physician services outpaced general inflation slightly in 2003.

This article presents an update of the Masterson Indexes, detailing the annual average cost indexes for property/casualty coverage from 1992 through 2003, plus a forecast for 2004. The annual changes in the indexes are shown in "Annual Percentage Changes, Claims Cost Indexes, United States."

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

During the 10 years since 1993, the individual indexes for physicians' services, hospital services, legal costs and auto-body work have exceeded the consumer price index for all items, as shown in the table, "Decennial Increases." Since these are key components in claims costs for the casualty insurance lines, it follows that those lines have experienced increases in claims costs that are considerably above the general inflation level.

The graph, "Yearly Increase in Costs by Line, United States," shows the annual change in the cost level for property, liability and multiperil lines from 1992 through 2003. Cost increases for property lines have stayed between 3.9% and 1.9% over the past five years. Multiperil cost increases for the period have varied from 2.5% to 4.3% for the same period. Liability cost increases in the past five years have stayed in the 3.5% to 5.1% range, with the 2004 estimate at 4.2%.

From 1992 to 1999, the increases in costs for physicians' services dropped from 6.3% to 2.1% before increasing to 3.7% in 2000, with 2002 to estimated 2004 showing further declines. The increases in hospital services costs fell from 8.8% in 1992 to 3.2% in 1997 and 1998. Since 1999, price increases have been moving upward, with 1999 at 4.1% and 2003 at 7.4%. Hospital costs show an estimated 2004 increase of 6.4%.

Gradually increasing legal cost trends peaked in 2003 at 5.9%, with 2004 estimated at 5.7%.

The average annual increases in costs for several major lines for the five-year periods from 1993 to 1998 and 1998 to 2003, as well as the three-year period from 2000 to 2003, are shown in "Average Increase, Claims Cost Indexes, United States." The general patterns of lower increases for property lines are repeated in the figures for the individual lines. The multiperil and liability lines are mostly flat in comparing the three- and five-year increases. However, the 2004 estimated multiperil and liability lines are showing an increase.

These indexes do not measure changes in the frequency of claims nor "social" inflation, which encompasses changes in attitudes toward litigation;

changes in jury attitudes; new theories of liability; and the push toward larger settlements given by large punitive-damage awards. They also are affected by the events of Sept. 11, 2001, only to the extent the underlying indexes are affected.

Editor's Note

This article presents an update of a family of price indexes for major lines of business written by property/casualty insurers. Originally developed in the 1960s by consulting actuary Norton E. "Doc" Masterson, the "Masterson Indexes" were first published by A.M. Best Co. in 1968. Questions or comments regarding the indexes should be directed to Jeremy P. Pecora at Towers Perrin, 1000 Town Center, Suite 950, Southfield, MI 48075, [e-mail].

The authors would like to thank the National Council on Compensation Insurance for providing an improved percentage breakout between the different types of worker segments. This breakout improved the quality of the indexes.

[GRAPHIC OMITTED]

Annual Percentage Changes, Claims Cost Indexes, United States

Base Index 1982-1984 = 100

Coverage                1992   1993   1994   1995   1996

Auto Bodily Injury      6.35   5.97   4.88   4.84   3.89
Auto Property Damage    3.90   4.36   4.24   3.70   3.80
Auto Physical Damage    2.95   3.40   3.94   3.02   3.75

Composite Auto          5.19   7.36   4.48   3.47   1.78
Workers' Compensation   5.42   4.86   2.56   1.65   3.71
Other Bodily Injury     6.78   6.13   4.81   3.85   3.85
Other Property Damage   4.16   3.93   4.17   2.77   3.29
Burglary & Theft        5.25   4.72   4.45   1.22   4.51
Boiler & Machinery      4.30   3.98   3.06   0.27   1.82
Fire                    2.18   4.11   3.57   1.76   3.10
Allied Lines            2.82   3.52   3.63   1.90   2.87
Homeowners              3.57   3.51   3.14   4.22   2.92
Commercial Multiperil   3.37   4.50   4.09   2.13   3.52
Inland Marine           4.13   3.21   3.51   3.45   3.83

Composite               5.47   4.20   3.85   3.20   2.38
CPI **, All Items       3.01   2.99   2.56   2.83   2.95

Coverage                1997   1998   1999   2000   2001

Auto Bodily Injury      3.96   3.90   4.48   5.60   4.43
Auto Property Damage    3.38   3.38   3.43   4.00   3.05
Auto Physical Damage    3.02   3.19   2.47   2.94   2.13

Composite Auto          3.61   3.63   1.63   4.58   0.81
Workers' Compensation   3.83   4.23   3.82   5.00   3.59
Other Bodily Injury     4.03   4.00   4.85   5.18   4.85
Other Property Damage   4.00   3.18   3.62   4.32   0.34
Burglary & Theft        3.80   3.32   5.20   3.75   2.30
Boiler & Machinery      4.89   2.27   2.96   0.93   0.78
Fire                    4.27   2.28   2.62   4.24   0.64
Allied Lines            4.25   2.27   2.68   3.35   2.47
Homeowners              3.24   3.03   3.75   3.98   2.54
Commercial Multiperil   4.41   2.96   3.17   2.56   1.77
Inland Marine           3.28   2.83   4.94   3.62   2.86

Composite               3.73   3.54   2.72   4.63   1.74
CPI **, All Items       2.29   1.68   2.08   3.36   2.85

Coverage                2002   2003   2004 *

Auto Bodily Injury      5.16   4.36     4.11
Auto Property Damage    4.37   3.12     2.56
Auto Physical Damage    3.86   1.72     1.12

Composite Auto          4.51   3.65     2.92
Workers' Compensation   5.32   4.35     6.83
Other Bodily Injury     6.08   4.72     4.14
Other Property Damage   3.51   2.66     3.16
Burglary & Theft        4.93   1.40     3.23
Boiler & Machinery      4.24   1.90     1.84
Fire                    3.73   1.84     2.34
Allied Lines            2.24   4.05     2.12
Homeowners              3.99   4.74     5.92
Commercial Multiperil   3.96   3.43     2.82
Inland Marine           3.49   2.43     2.66

Composite               4.54   4.03     3.85
CPI **, All Items       1.58   2.28     1.88

* Estimated

** Consumer Price Index

Source: Towers Perrin

Average Increase, Claims
Cost Indexes, United States

                              5-Year         3-Year
                             Increase       Increase

Coverage                '93-'98   '98-'03   '00-'03

CPI *, All Items         2.46      2.43       2.23
Auto Bodily Injury       4.29      4.80       4.65
Auto Property Damage     3.70      3.59       3.51
Auto Physical Damage     3.39      2.62       2.56
Workers' Compensation    3.19      4.41       4.42
Other Bodily Injury      4.11      5.13       5.22
Other Property Damage    3.48      2.88       2.16
Homeowners               3.31      3.80       3.75
Commercial Multiperil    3.42      2.97       3.05

* Consumer Price Index

Source: Towers Perrin

Decennial Increases

Base index, 1982-1984 = 100

                                                   %
Cost for:                    1993    2003   Increase

CPI *, All Items            144.5   184.0      27.34
CPI *, Physician Services   191.3   267.7      39.94
CPI *, Hospital Services    226.4   383.3      69.31
Legal Costs                 176.6   255.3      44.57
CPI *, Auto Body Work       147.9   202.9      37.19

* Consumer Price Index

Source: Towers Perrin

Jeremy P. Pecora is a consulting actuary with Towers Perrin.