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Increases in Price of Health, Legal Services Impacted Costs of Property/Casualty Insurers in 2009

Source: III

Posted on 03 Feb 2010

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The costs of U.S. healthcare and legal services rose anywhere from 3 percent to 6 percent in 2009 even as the annual consumer price index (CPI) dropped 0.4 percent, thereby driving up the cost of doing business for the nation's property/casualty (P/C) insurers, an Insurance Information Institute (I.I.I.) analysis found.

“Auto and workers compensation insurers are sensitive to hospital, physician and legal service fee increases, and every single one of those items cost more in 2009 than they did in 2008,” said Dr. Steven Weisbart, the I.I.I.’s chief economist. “This is particularly notable in a year when the overall CPI actually decreased, something which hadn’t happened in the United States since 1955.”

Hospital service prices increased 6.4 percent in 2009, according to the federal government’s year-end CPI report, while the fees for physicians’ services and legal services also moved upward, by 3 percent and 2.7 percent respectively. Drilling it down even further, the cost of a new car increased only 0.9 percent in 2009, compared to 2008, but over this same time frame auto body repair shop prices grew by 3.2 percent.

The overall CPI is based primarily on the prices of food, clothing, housing, energy and transportation, as well as other goods and services people purchase for day-to-day living, according to the Bureau of Labor Statistics. Charges for doctors’ and dentists’ services are calculated as part of the overall CPI index but do not carry the weight of food, clothing, housing, energy and transportation prices. The CPI is also commonly considered as the benchmark for the inflation rate.

“Our roadways and workplaces are safer today than they’ve ever been,” Dr. Weisbart continued. “But just because claim frequency is down doesn’t mean these claims cost insurers less money. The 2009 CPI data show that healthcare and legal costs ran well ahead of the overall inflation rate, and these two sectors are major cost drivers for most personal and some commercial insurance coverages.”

In addition to writing auto and commercial insurance, P/C insurers provide coverage to homeowners, who all too often seek to lower their insurance coverage as real estate market prices fall.

“Although construction material costs in 2009 were generally flat, they didn’t drop as home prices did, and it would be short-sighted for a homeowner to lower his or her policy coverage limits,” Dr. Weisbart concluded. “The key criterion when insuring a home is assessing its reconstruction cost, in the event of a total loss, not what the house would sell for if it were put on the market today.”