A recent AM Best report shows that commercial auto liability insurance coverage continues to be hit by rising litigation costs, which are growing faster than economic inflation.
Over the years, social inflation has had a negative impact on the final commercial auto liability claim cost, as is evident from the average claim severity. Economic inflation will average 2.8% annually from 2014 to 2024. Over the same period, commercial auto liability insurance claims grew at an annual rate of 6.4% in the first 12 months, more than double the annual rate of economic inflation, AM Best said.
AM Best defines social inflation as an increase in the cost of insurance claims that exceeds general economic inflation, driven by social and legal trends such as increased jury verdicts, increased litigation and expanded definitions of liability.
AM’s best special reports: Social inflation puts pressure on U.S. property/casualty liability outcomes
Commercial auto liability losses are limited by policy limits, usually $1 million. If this type of coverage is available, personal auto claims that result in loss payments exceeding that threshold will fall under the umbrella policy.
In 2018, umbrella pricing is closely related to general liability pricing. However, as social inflation began to impact commercial auto claims and these claims spread into umbrella coverage, pricing for the latter has diverged away from general liability, become more expensive, and has yet to return to previous levels.
Historically, umbrella pricing followed general liability, but more recently, AM Best Associate Director David Blades said, “As social inflation starts to impact commercial auto claims and those claims creep into umbrella coverage, umbrella pricing goes against general liability and becomes more expensive.”
Other highlights from the report include:
- The longer a claim takes to trial, the more jury precedent will be required and will likely result in increased claim adjustment fees.
- After adjustments to billing rates, the frequency of commercial auto claims has increased over the past decade, which has also contributed to the gap between what has been paid and what is expected to be paid.
- Tort reform may help. Comprehensive tort reform in Florida has helped offset exorbitant litigation costs, resulting in a downward trend in average paid claim severity.
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Auto Claims Business Insurance Business Insurance AM Best Liability
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