Claims inflation
Rise in claims costs over time, driven by economic inflation and evolving judicial and medical practices.
Warren Buffett was already writing about social inflation in his 1977 letter to Berkshire Hathaway shareholders: society and juries were broadening what an insurance policy covers, and claim costs were rising close to 1% a month. Claims inflation gathers everything that pushes up the unit cost of a claim over time: economic inflation (materials, parts, labor), medical inflation (care, rehabilitation), judicial or social inflation, and regulatory change. In property and casualty, it routinely outruns the price index. In bodily injury liability, judges are more generous than the CPI would suggest. It is a first-order parameter of prospective pricing and of as-if restating of historical data.
Textbook case: the average cost of a motor bodily injury claim rises 7% a year for four years, while the price index rises 3.5% a year. Claims inflation runs 3.5 points a year above general inflation, and pricing that restated history on the CPI would underestimate the coming year's losses.
claims inflation, social inflation, loss cost trend
Follow the research
One letter a week. First, the week's underwriting note, when one is published: a dated, argued decision, signed by Paul Bernardski. Then what the observatory published on cyber risk, political risk and insurance. No account, no tracking.
No spam, one-click unsubscribe, no data ever sold.