Auto Claims Environment Shifting

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Chicago – While auto injury claims are falling in frequency, they are rising in severity, according to a new report from the Malvern, Penn.-based Insurance Research Council (IRC). The report, “Trends in Auto Injury Claims, 2008 Edition,” documents auto insurance claim frequencies and costs, both countrywide and by state, using private passenger auto claim data from national and state-level statistical reporting agencies.

The report examines recent trends for three major types of auto insurance coverage: property damage liability (PD), bodily injury liability (BI) and personal injury protection (PIP). From 2000 through 2006, PD claim frequency (the number of PD claims per 100 insured vehicles) decreased 11%, BI claim frequency decreased 19% and PIP claim frequency fell 14%. These declines in claim frequencies mirror national trends in fatality and injury rates and indicate significant progress in efforts to make vehicles, roads and highways safer for the driving public.

Paradoxically, the report also documents an increase in claim severity, or the average cost of claims. From 2000 to 2006, PD claim severity increased 18%, BI claim severity increased 22% and PIP claim severity rose 19%. On an annualized basis, increases in claim severity from 2000 to 2006 averaged 2.9% (PD), 3.3% (BI) and 2.9% (PIP). The report attributes increases in claim severity largely to the rising cost of automobile repair and medical care. 

“The continued drop in claim frequencies has offset escalating car repair and medical care costs,” says Elizabeth Sprinkel, SVP of the IRC. “However, if claim frequencies start to rise or even just stop declining, then rising claim severities will increase loss costs, creating upward pressure on premiums for consumers.”

The rise in repair costs makes sense in light of findings by the Arlington, Va.-based Insurance Institute for Highway Safety (IIHS). Its January 2008 status report bares the direct correlation between an automobile’s horsepower and estimated collision loss. The study, using data from the Highway Loss Data Institute, notes that between 1985 and 2005, average horsepower climbed 64% to 183 from 111. “Automakers are putting faster, more powerful engines in even the humblest of vehicles, and insurance losses are rising in tandem,” the report states.

Likewise, a study from San Diego-based Mitchell Industries Inc., a maker of auto and health claims estimation solutions, notes the expanding use of aluminum body parts and popularity of hybrid vehicles is adding to the increase in average repair costs. Also of concern for insurers is how inflation in the cost of medical care is impacting auto bodily injury claim severity

Tom McCarthy, EVP and founder of Mitchell Medical, says that insurers can use a comprehensive medical management system to control costs and combat this trend. "It is critical for insurers to be aware of the importance of streamlining cost controls and improving performance," McCarthy says. "If insurers understand just how important a total medical management system is to the injury claims process, they will be better able to serve their customers by efficiently handling the review process."

Sources: IRC, IIHS, Mitchell Industries Inc.

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