A Bunch of Inflation-Related
Inflation
From
All
Angles
Stuff We Thought Was
Interesting
Or . . .
Casualty Actuarial Society Spring Meeting
Colorado Springs, CO
May 18, 2015
Download at www.iii.org/presentations
Steven Weisbart, PhD, chief economist/James Lynch, FCAS MAAA, chief actuary
Insurance Information Institute  110 William Street  New York, NY 10038
Tel: 212.346.5533  Cell: 917.359.3908  jamesl@iii.org  www.iii.org
What’s the Best Way to Measure
Past Inflation?
2
Change* in the Consumer Price Index,
2004–2015
6%
For two months in 2008, led by
gasoline, the general price level
was rising at a 5.5% pace
Recession
CPI
Core CPI
Lately, core
CPI is rising
at a 1.8%
y-o-y pace
4%
2%
0%
When gas prices dropped,
the general price level was
briefly lower than a year prior
-2%
'04
'05
'06
'07
'08
'09
'10
'11
'12
'13
'14
'15
Over the last decade, prices generally rose about 2% per year.
*Monthly, year-over-year, through March 2015. Not seasonally adjusted.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institutes.
3
The “Billion Prices” Project Tracks Daily
Price Changes for Internet Purchases
Source: http://blogs.wsj.com/economics/2015/03/13/the-billion-prices-project-thinks-inflation-may-have-turned-a-sharp-corner/
4
Change* in the Consumer Price Index and
Core CPI, 1990–2014, Semi-annually
6%
Recession
CPI
Core CPI
For a half year at a time, the Core
CPI has generally stayed within
a range of 2% - 2.5% since 1997
5%
4%
3%
2%
1%
0%
2014:1H
2013:1H
2012:1H
2011:1H
2010:1H
2009:1H
2008:1H
2007:1H
2006:1H
2005:1H
2004:1H
2003:1H
2002:1H
2001:1H
2000:1H
1999:1H
1998:1H
1997:1H
1996:1H
1995:1H
1994:1H
1993:1H
1992:1H
1991:1H
1990:1H
-1%
Over the last 18 years, prices generally rose about 2% per year.
*Semi-annually, through 2014:2H. Not seasonally adjusted.
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
5
The PCE Deflator
The y-o-y core PCE price
index has stayed between
1% and 2% for 15 years
6
Y-o-Y Percent Change in Core PCE
Price Index, Monthly, 2010–2015
2.5%
Jan. 2012:
2.1%
2.0%
1.5%
1.0%
0.5%
Dec. 2010:
0.9%
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
0.0%
In December 2010, prices were falling. But the trend of price changes can change
fairly quickly, even in a time of weak economic growth. Prices began rising in
January 2011 and kept doing so for 13 months.
Sources: U.S. Department of Commerce, Bureau of Economic Analysis, at
http://www.bea.gov/iTable/iTable.cfm?reqid=12&step=1&acrdn=2#reqid=12&step=1&isuri=1 Table 2.4.4U
Insurance Information Institute.
7
PCE Deflator: Goods vs. Services
The price spike in 2011 was caused
by a spike in the price of goods,
while services prices were stable
The price index for
goods is much
more volatile than
the price index for
services
8
Should We Focus on Price
Changes in a More Granular Way?
10
Prices for Hospital Services:
12-Month Change,* 1998–2014
December 2014
Inpatient services +5.5%
Outpatient services +4.5%
14%
12%
10%
8%
6%
4%
2%
0%
'98
'99
'00
'01
'02
'03
Recession
'04
'05
'06
'07
'08
Outpatient Services
'09
'10
'11
'12
'13
'14
Inpatient Services
Prices for Hospital Services have risen at an annual rate of 4% or more
for the last 15 years, while the general price level rose by 2%/year.
*Percentage change from same month in prior year; through December 2014; seasonally adjusted
Sources: US Bureau of Labor Statistics; National Bureau of Economic Research (recession dates); Insurance Information Institute.
11
Constant Quality Price Index for Single Family
Houses Under Construction, Monthly, 2006-2015
Price Index,
Jan. 2005 = 100
120
115
110
Prices began dropping
in April 2007—
9 months before the
Great Recession
started
Annual Price
Changes
2006: +6.0%
2007: +0.9%
2008: -3.5%
2009: -5.0%
2010: -1.7%
2011: +1.0%
2012: +1.0%
2013: +6.5%
2014: +6.7%
105
100
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
95
The current rise
began in Feb.
2012
Note: Recession indicated by gray shaded column. Price changes in 2015 are preliminary
Sources: Census Bureau at https://www.census.gov/construction/cpi/ ; NBER (recession dates); I.I.I.
12
P/C Industry Homeowners Claim Frequency,
US, 1997-2013
Claims Paid per
100 Exposures
CAT-related claims
Non-CAT-related claims
All Claims
10
9.53
8.10
8
6.99
8.85
8.79
8.56
7.99
7.52 7.30
6.71
6
6.45 6.26 6.53
7.43
6.40 6.61
5.83
6.51 6.48
6.05
5.26
4.63
2
1.57
2.34
1.84
5.03
4.12 4.14 4.21
3.83 3.64 3.77 3.94 4.01
3.78 3.70
3.53
3.42
2.97
2.73
2.67 2.57
2.39 2.34
2.28
4
2.82
6.43
2.32
1.69
1.32
1.50
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” p.41; Insurance Information Institute
P/C Industry Homeowners Average Claim
Severity, Inflation-adjusted, 1997-2013
2013 dollars
$9,000
non-cat claims
cat claims
$8,000
$7,000
$6,000
$5,000
$4,000
Inflation-adjusted, HO
average claim severity
is now over twice what
it was in 1997.
$3,000
$2,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 41; BLS inflation calculator,
with Insurance Information Institute calculations
Price Changes for Nonresidential
Maintenance & Repair, Monthly, 2010-2015
The effect of repair
costs on claims
depends on when the
work is priced.
Y-o-Y Price Changes
1.5%
1.0%
1.5%
1.7%
1.7%
1.4%
1.2%
1.5%
1.5%
1.1%
0.9%
1.0%
0.9%
1.2%
1.4%
1.3%
1.5%
1.6%
1.6%
1.4%
1.3%
2.0%
1.9%
1.9%
2.5%
2.1%
1.8%
1.8%
2.0%
1.6%
1.4%
1.4%
1.2%
1.2%
1.1%
1.1%
1.1%
1.0%
1.5%
1.8%
1.8%
1.7%
1.7%
1.7%
1.8%
2.0%
2.0%
2.1%
2.0%
2.1%
1.8%
1.6%
1.8%
1.9%
2.1%
2.3%
2.3%
2.2%
2.5%
2.6%
2.7%
1.9%
1.8%
1.9%
3.0%
Annual Price
Changes
2011: +1.3%
2012: +1.4%
2013: +1.8%
2014: +2.2%
0.5%
Jan 15
Jul 14
Jan 14
Jul 13
Jan 13
Jul 12
Jan 12
Jul 11
Jan 11
Jul 10
0.0%
Prices for nonresidential maintenance & repair have been rising slowly
since 2011. Price data for 2015 are preliminary.
Sources: US Bureau of Labor Statistics, Producer Price Index Series Id: PCU2381MR2381MR; Insurance Information Institute
15
What about Wage Trends? Isn’t
that a Major Cause of Inflation?
16
Indexed Cost of Total Compensation
per Hour Worked, Quarterly, 2004-2014
Recession
Index: 2004:Q1 = 100
CPI
Index
135
130
125
120
115
Note: Recession indicated by gray shaded column.
Sources: Bureau of Labor Statistics; NBER (recession dates); I.I.I.
2014:Q1
2013:Q1
2011:Q1
2010:Q1
2009:Q1
2008:Q1
2007:Q1
2006:Q1
2005:Q1
100
2004:Q1
105
2012:Q1
Following 2008,
compensation has
grown slightly
faster than the CPI
110
17
What’s the Best Way to Forecast
Future Inflation?
19
Inflation Forecasts in Econometric
Models, 2015- 2020
2.3%
2.3%
2.3%
2.4%
2.3%
2.4%
2.4%
2.3%
2.4%
2.4%
2.2%
2.4%
2.3%
2.1%
2.0%
2.3%
2.2%
3.0%
…but the FOMC is forecasting
the PCE Inflation rate to be 0.6%0.8% in 2015, 1.7%-1.9% in 2016,
and 1.9% to 2.0% in 2017.
There seems to be general
agreement: the CPI will rise by
about 2.3% for the next 5 years…
0.3%
1.0%
0.0%
2015
2016
2017
CBO
2018
OMB
2019
2020
2021
Blue Chip
In the Blue Chip survey, the range of CPI forecasts for 2015 is -1.0%
to +1.5%. For 2016 it is +1.0% to +3.2%.
20
Sources: Blue Chip Economic Indicators (3/2015 issue); Wells Fargo Economics Group Interest Rate Weekly, May 6, 2015; Insurance Information Institute
The Bond Market’s Recent* Expectation
of U.S. Inflation in the Next Five Years
At the start of 2013 the
bond market thought
inflation was likely to rise
at a 2.25% clip.
Current
expectations are for
inflation over the
next 5 years are
near 1.75% per year.
The chart was derived by subtracting the TIPS 5-year yield (which has no
inflation component) from the yield for the 5-year U.S. Treasury note
(which, at least in theory, includes anticipated inflation).
Source: http://ycharts.com/indicators/5_year_tipstreasury_breakeven_rate ; I.I.I.
21
Has the Upward Inflation Spike Begun?
“Inflation by most measures has begun to
move up again the past two months, following
a string of negative readings that lasted
through January.”
Source: Inflation: Back on Solid Ground? Wells Fargo Economics Group, Special Commentary, May 4, 2015; I.I.I.
22
Inflation and P/C Insurer
Investments
If Expected Inflation Remains Low,
Will Bond Yields Be Mired at Levels
Last Seen in the 1950s?
23
U.S. Treasury 2- and 10-Year Note
Yields*: Monthly, 1990–2015
Yields on 10-Year U.S. Treasury
Notes have been essentially
below 5% for over a decade.
U.S. Treasury
10-year note
yields “spiked”
Since roughly 80% of P/C bond/cash investments are in 10-year or shorter durations,
most P/C insurer portfolios will have low-yielding bonds for years to come.
*Monthly, constant maturity, nominal rates, through January 2015.
Sources: Federal Reserve Bank at http://www.federalreserve.gov/releases/h15/data.htm.
National Bureau of Economic Research (recession dates); Insurance Information Institutes.
24
New Money vs. Embedded Yields,
U.S. Insurers, 1983-2012
Falling yields means less
investment income, putting
upward pressure on rates.
As long as new money rates are below the rates of maturing bonds,
the portfolio yield will continue to sink.
Sources: NCCI, Insurance Information Institute.
25
Net Yield on P/C Insurer Invested
Assets, 2007-2014:Q3
Since year-end 2007, P/C Insurer net yields dropped by 133 basis
points. This downtrend is likely to continue as older, higher-yielding
bonds mature and are replaced by lower-yielding ones.
Sources: NAIC, via SNL Financial; I.I.I.
26
Distribution of Bond Maturities,
P/C Insurance Industry, 2005-2014
2014
16.8%
37.1%
30.8%
9.6% 5.7%
2013
16.5%
38.8%
29.3%
9.8% 5.7%
2012
16.6%
2011
15.2%
41.4%
2010
16.3%
39.5%
40.4%
27.6%
9.8% 5.7%
26.8%
10.3% 6.3%
26.7%
11.1% 6.4%
Under 1 year
1-5 years
5-10 years
2009
16.2%
2008
15.7%
2007
15.2%
30.0%
2006
16.0%
2005
16.0%
0%
28.7%
36.2%
7.3%
10-20 years
12.7%
8.1%
over 20 years
33.8%
12.9%
8.1%
29.5%
34.1%
13.1%
7.4%
28.8%
34.1%
13.6%
7.6%
31.2%
32.4%
20%
11.7%
40%
60%
80%
100%
The main shift over these years has been from longer maturities to
shorter maturities, but the 2013-14 data suggest a shift back has begun.
The 2014 distribution resembles that at year-end 2009.
Sources: SNL Financial; Insurance Information Institute.
27
Bonds Rated NAIC Quality Category 3-6
as a Percent of Total Bonds, 2003–2014
From 2006-07 to year-end 2012, the
percentage of lower-quality bonds
in P/C industry portfolios doubled
5.0%
4.36%
4.07%
3.99%
2012
2013 2014:Q3
4.0%
3.0%
2.69%
3.07%
3.10%
2010
2011
2.58%
2.10%
2.17%
2004
2005
2.0%
1.98%
2.04%
2006
2007
2.27%
1.0%
0.0%
2003
2008
2009
There are many ways to capture higher yields on bond portfolios.
One is to accept greater risk, as measured by NAIC bond ratings.
The ratings range from 1 to 6, with the highest quality rated 1.
Even in 2014, over 95% of the industry’s bonds were rated 1 or 2.
Sources: SNL Financial; Insurance Information Institute.
Moody’s AAA Seasoned Bond Yields
vs. CPI, 1954-2014
15%
14%
13%
12%
11%
10%
9%
8%
7%
6%
5%
4%
3%
2%
1%
0%
-1%
Moody's AAA Seasoned Bond Yields
2014
2012
2010
2008
2006
2004
2002
2000
1998
1996
1994
1992
1990
1988
1986
1984
1982
1980
1978
1976
1974
1972
1970
1968
1966
1964
1962
1960
1958
1956
1954
The gap is
narrowing
CPI
As a general rule, the CPI trend drives bond yields.
Sources: BLS, https://research.stlouisfed.org/fred2/data/AAA.txt ; Insurance Information Institute.
30
What Inflation Doesn’t Measure
The Idea:
Trend ≥ Inflation
(And Always Will Be)
31
Case Study: Inflation in Auto Prices
CPI-U: New Cars
150
1997 to Present: No Inflation
145
140
135
130
125
120
115
110
105
2014-1
2013-1
2012-1
2011-1
2010-1
2009-1
2008-1
2007-1
2006-1
2005-1
2004-1
2003-1
2002-1
2001-1
2000-1
1999-1
1998-1
1997-1
1996-1
1995-1
1994-1
1993-1
1992-1
1991-1
1990-1
1989-1
1988-1
1987-1
1986-1
1985-1
1984-1
100
According to Government, Auto Prices Have Been ‘Flat’ for Nearly Two
Decades.
Not Seasonally Adjusted. 1982-84 = 100.
Sources: Bureau of Labor Statistics, Insurance Information Institute.
32
Inflation in Auto Prices
CPI-U: New Cars vs. New Car Expenditures
200
BEA New Car
Expenditure
Great Recession
Which Is Better Trend Index?
190
Inflation Index
180
170
Basis of Settlement When
Car Is Totaled
160
CPI-U New Cars
150
140
JAN15
JAN14
JAN13
JAN12
JAN11
JAN10
JAN09
JAN08
JAN07
JAN06
JAN05
JAN04
JAN03
JAN02
JAN01
JAN00
JAN99
JAN98
JAN97
130
According to Government, Auto Prices Have Been ‘Flat’ for Nearly Two
Decades. But New Car Expenditues Are Up 35%.
Expenditure Indexed to CPI-New Autos as of January 1997. Not Seasonally Adjusted. For CPI, 1982-84 = 100.
Sources: Bureau of Economic Analysis, Insurance Information Institute.
33
Auto Prices vs. Auto Inflation
% Increase, 1990-2013
90.0%
81.0%
80.0%
67.6%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
20.0%
10.0%
0.0%
CPI-U All Items
CPI-U New Car
New Car Expenditure
From 1990 to 2013, Actual New Car Prices Rose Three Times Faster Than
New Car Inflation Rate.
Not Seasonally Adjusted. 1982-84 = 100.
Sources: Bureau of Economic Analysis; Bureau of Labor Statistics; Calculations by Insurance Information Institute.
34
Auto Prices vs. Auto Inflation
% Increase
New Car Prices
CPI-U
160%
Auto Price Increases
Regularly Outstrip Inflation.
140%
120%
135%
109%
100%
82%
80%
72%
65%
60%
40%
33%
27%
24%
20%
12%
2%
12%
8%
0%
1950s
1960s
1970s
1980s
90-08
08-13
The Difference: Safety Improvements, Conveniences.
Not Seasonally Adjusted.
Sources: The People History; Bureau of Labor Statistics; Calculations by Insurance Information Institute.
35
BLS Quality Adjustments
 Safety Improvements
 Durability
 Airbags
 Stronger Bumpers
 Seatbelts
 Flexible Body Panels
 Mechanical/electrical
 Braking Improvements
 Battery Life
 Comfort/convenience
Changes
 Remote Door Locks
 GPS Systems
36
Typical Adjustments
(2013-14 Model Years)
These All Affect Price of
Car, But Not Auto CPI.
No More 6-disk CD Player$(30)
Remote Start (Made Standard)
$60
HID Headlamps
$120
Maintenance Changes
$300
Warranty Changes
$124
MPG Changes
$22
Emissions Changes
$84
Rear View Camera
$120
Front Knee Airbag
$80
Lane Departure Warning
$120
Brake Assist
$40
Center Side Impact Air Bags
$(50)
$540 in Safety
Changes.
$180
$-
$50
$100
$150
$200
$250
$300
$350
Changes Above Would Increase Car Price By $1,220. CPI Impact – 0%.
Sources: Bureau of Labor Statistics, Insurance Information Institute.
37
Auto Price Change: Quality vs. Inflation
$1,400
Quality
1,130
$1,200
Inflation
Value of Improvements
> Change in Price, so
Inflation is Negative.
$1,000
$800
570
443
318
209
48
90
98
75
111
185
151
95
29
83
25
16
63
107
170
271
311
384
275
210
213
239
169
140
$200
132
231
148
186
$400
441
$600
$0
(13)
(105)
(106)
(151)
-$200
Model Year
Sales Year Is to Model Year as Calendar Year Is to Policy Year
Sources: Bureau of Labor Statistics, Insurance Information Institute.
38
Other Adjustments (A Quiz)
It Doesn’t Change
PV(Car)!
Adjustment
Counted As
Inflation
Not Counted
As Inflation
Mix of Model Years Within Sales Year
Environmental (Clean Air Regs.)
Rebates
Concessions (Negotiation)
Low Interest Financing
It’s an Apples-to-Apples
Comparison!
It’s A Pigovian Tax!
Of Course It Is!
Of Course It Is!
39
Inflation vs. Trend (The Sequel)
The Idea:
Trend ≥ Inflation
(Except When It Isn’t)
41
An Example: Homeowners
non-cat claims
Paid Severity in 2013 dollars
cat claims
$10,000
Since 2009: 0.3
Points/Yr Above
CPI.
$9,051
1997-2009: 6.8
Points/Year Above CPI.
$9,000
$7,665
$8,833
$8,772
$8,633 $8,527 $8,541 $8,718
$8,222
$8,823
$8,000
$8,034
$7,000
$7,849
$7,383
$6,637
$6,134
$5,249
$6,000
$7,614
$7,331 $7,332
$7,039
$6,679
$6,829
$7,444
$5,402
$5,000
$4,000
$4,414
$5,041 $4,965 $4,964
$3,932 $4,032
$4,755
$3,671
$3,867
$4,435
$3,000
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
There Can Be Periods Where CPI > Severity Change.
Sources: Insurance Research Council, “Trends in Homeowners Insurance Claims,” 2015 edition, p. 41; BLS inflation calculator,
with Insurance Information Institute calculations
Another Example: WC Medical
Average Annual Growth, 2002-09
WC Medical Severity: 6%
10%
9%
Medical CPI: 4%
8.8%
8%
7.8%
7.7%
7%
6.8%
6%
5%
…But Since 2010 WC
Medical Severity has
Closely Tracked the
Medical CPI
5.4%
5.8%
6.1%
4.4%
4.7%
4%
4.0%
3%
4.0%
3.4%
4.4% 4.2% 4.0%
3.7%
2%
3.5%
3.0%
3.0%
3.2%
1%
2.6% 3.0%
2.5% 2.4%
1.2%
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Sources: CPI and Med CPI from US Bureau of Labor Statistics, WC med severity from NCCI based on NCCI states.
Another Example: WC Indemnity
Change in Median Usual Weekly Earnings
Change in Indemnity Cost per Lost-Time Claim
12%
10.1%
9.2%
9.0%
10.1%
10%
5.9%
6%
2%
Similar to Medical
Benefits – Suddenly
Tracking Inflation
7.7%
8%
4%
9.1%
5.9%
4.6%
3.1%
5.0%4.9%
2.6%
4.0%
1.7% 2.3%
3.5%
3.1%
3.1%
2.9%
2.7%
6.5%
3.6%3.9%
2.0%2.0%
2.0%
1.0%
0%
2.0%
1.1% 1.1%
1.0%
2.4%
1.2%
-2%
0.5%
1.6%
1.0%
-2.7%
NCCI data on WC severity is based on the states where NCCI provides ratemaking services. Excludes the effects of deductible policies.
Sources: NCCI, BLS, from Current Population Survey.
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
-4%
And One Last Example: PD Liability
Annual Change, 2005 through 2014
Severity
. . . And Diverged
in 2013
Severity Converged
in 2009 . . .
New Auto CPI
5%
4.2%
4%
3.6%
3%
3.5%
3.0%
2.9%
2%
2.0%
2.0%
0.9%
1%
1.0%
0.9%
2005
2006
2.3%
1.8%
1.4%
0.4%
-0.4%
0%
1.0%
2007
-0.3%
2008
0.5%
-0.4%
2009
2010
2011
-1%
2012
2013
-0.3%
2014
Aftermath of
Great Recession
Source: ISO/PCI Fast Track data, Bureau of Labor Statistics, Insurance Information Institute.
45
How Could Inflation > Trend?
 Δ Severity = Δ Quality + Δ Inflation
 Base Case: Δ Severity > Δ Inflation
 Δ Severity < Δ Inflation Implies . . .
 . . . Δ Quality < 0.0
 Are Cars Getting Worse?
 NAH!!!!
 Better Insurance Claims Control?
 Safer Cars Eliminate Expensive Claims?
 We Do Need to Think About Impact When
Δ Severity → Δ Inflation – Will It Diverge Again?
46
What About Loss Reserves?
The Idea:
Inflation Lags Long-Term Average,
And So Does Loss Trend
51
Loss Development Factors
Age to Age Reported Loss Development Factors - P&C Industry
12 - 24
Months
Accident Year
24 - 36
Months
36 - 48
Months
48 - 60
Months
60 - 72
Months
72 - 84
Months
84 - 96
Months
96 - 108
Months
108 - 120
Months
2.0677
1.4502
1.3170
1.1979
1.0866
1.0839
1.0762
1.0756
1.0517
2002
1.8992
1.5481
1.2450
1.1726
1.1063
1.0549
1.0730
1.0529
1.0307
1.8481
1.5093
1.2143
1.1685
1.1060
1.0649
1.0781
1.0525
1.0516
1.8071
1.3148
1.3307
1.1333
1.1198
1.1036
1.0531
1.0552
1.0406
1.6358
1.5082
1.3227
1.2186
1.1718
1.0813
1.0572
1.0675
1.0535
1.6401
1.4941
1.3249
1.1397
1.0859
1.0767
1.0803
1.0672
1.8650
1.4456
1.3850
1.1379
1.1152
1.0426
1.0425
1.8177
1.4458
1.1900
1.1542
1.0903
1.0720
2009
1.7207
1.3274
1.2050
1.1175
1.0926
2010
2.0081
1.2872
1.2918
1.1531
2011
1.7579
1.4266
1.2254
2012
1.8335
1.4336
2013
1.7573
2003
2004
2005
2006
2007
2008
Low
Inflation
2001
Low Inflation & Trend
Note Downward Trend
Averages
12 - 24
Months
24 - 36
Months
36 - 48
Months
48 - 60
Months
60 - 72
Months
72 - 84
Months
84 - 96
Months
96 - 108
Months
108 - 120
Months
Industry - All Years Wtd
1.8186
1.4290
1.2763
1.1586
1.1073
1.0716
1.0656
1.0620
1.0458
Industry - 5 Years
1.8155
1.3841
1.2594
1.1405
1.1112
1.0752
1.0623
1.0591
1.0456
Industry - 3 Years Wtd
1.7811
1.3782
1.2405
1.1423
1.1005
1.0624
1.0591
1.0633
1.0485
Weighted
1.8051
1.3971
1.2587
1.1471
1.1063
1.0697
1.0623
1.0615
1.0466
Manual Selected
1.8051
1.3971
1.2587
1.1471
1.1063
1.0697
1.0623
1.0615
1.0466
All Factors Have Low Inflation. Past Three Years Have Low Trend.
Source: Other Liability-Occurrence Factors From SNL Financial, Insurance Information Institute
52
What If Inflation, Trend Return?
15.2% of Stated Reserves
Some Economists Advocate Targeting
A 2-Point Higher Inflation Rate
Unanticipated Trend/Inflation
4.0%
88.2
10.9% of Stated Reserves
3.0%
63.6
2.0%
7.2% of Stated Reserves
41.7
1.5%
5.3% of Stated Reserves
30.6
1.0%
3.4% of Stated Reserves
20.0
-
10.0
20.0
30.0
40.0
50.0
60.0
70.0
80.0
90.0
100.0
Industry Deficiency vs. Stated Reserve (Billions of USD)
Source: Calculations by Insurance Information Institute using 2014 Industry Data from SNL Financial.
53
Which Lines Are Most Vulnerable to 2%
Spike in Inflation/Trend?
Distribution of Reserve Increase By Line of Business
Reinsurance
8%
Product Liab
4%
Other
4%
HO
2%
PP Auto Liab
10%
Comm Auto Liab
4%
Spec/Other Liab
25%
WC
33%
MPL
5%
CMP
5%
Source: Calculations by Insurance
Information Institute using 2014 Industry
Data from SNL Financial.
54
Which Lines Are Most Vulnerable to 2%
Spike in Inflation/Trend?
Increase By % of Stated Reserve
8.0%
7.3%
6.9%
7.0%
5.7%
6.0%
5.0%
4.0%
4.3%
3.6%
5.8%
6.0%
4.6%
3.4%
3.0%
2.4%
2.0%
1.0%
0.0%
Some of These Lines Are Already Redundant Industrywide.
Source: Calculations by Insurance Information Institute using 2014 Industry Data from SNL Financial.
55
Inflationary Miscellany
The Idea:
We Had A Couple of Interesting
Slides That Didn’t Fit Anywhere
Else
56
Auto Insurance Expenditures vs. Auto Insurance
Inflation, 1995-2012
Avg. Exp
CPI for Auto Insurance Has
Roughly Matched NAIC
Expenditure Data from 19952004 . . .
6%
2.8%
2.1%
1.5%
0.6%0.4%
1.1%
0.7%
-0.3%-0.2%
14
13
12
11
10
09
08
05
03
02
01
99
98
97
96
95
00
-2.6%
-3%
0.6%0.6%
-0.5%
-1.0%
-1.3%
-1.8%-2.1%
07
0%
5.1%
4.7%
4.5%
4.2%
3.6%3.6%
2.5%
2.1%
06
3%
5.6%
5.2%
4.4%
4.2%4.1%
3.4%3.2%
2.6%
2.0%
1.1%
But Auto Insurance Inflation
Has Been 2 to 4 Points Higher
Than NAIC Since 2005
8.8%
8.3%
7.8%
04
9%
Prices
Reasons for the Gap: Higher Deductibles, Lower Limits, Fewer Buying FirstParty Coverage?
Sources: NAIC for 1995-2012; BLS for auto price changes; I.I.I.
57
If Frequency Is Falling, Why Does Auto
Insurance Keep Costing More?
Safer Cars . . . .
. . . That Cost More to Repair.
Frequency
Severity
8
7
18,000
7.92
UP 1,251%
Down 55%!
6
14,000
Down 63%!
5
4.22
4
15,443
16,000
3.55
3
2.61
2
1.23
1
Claim Severity
Claims per 100 Insured Vehicles
9
12,000
10,000
UP 1,666%!
7,553
8,000
6,000
4,000
3,231
0.95
1,288
2,000
1,143
183
0
Property Damage
1963
1988
Bodily Injury
2013
0
Property Damage
1963
1988
Bodily Injury
2013
Sources: Insurance Institute for Highway Safety, Insurance Services Office, Insurance Information Institute.
58
Auto Claims Have Grown Faster Than
Inflation for 50 Years
Percentage Change, 1963-2013
1800%
1666%
1600%
1400%
1251%
1200%
1000%
800%
650%
600%
400%
200%
0%
CPI-U
Bodily Injury Severity
Property Damage Severity
Sources: Insurance Services Office, Bureau of Labor Statistics, calculations by Insurance Information Institute.
59
Insurance Information Institute Online:
www.iii.org
Thank you for your time
and your attention!
Twitter: twitter.com/@III_Research
64