Product Update

Consumer Price Index Factors and US Claims Cost Indexes Updated in Risk Financing

This release of Risk Financing features updates to the consumer price index factors and to the latest Willis Towers Watson Claims Cost Indexes (also known as US claims cost indexes) along with updates to various discussion and models that provide examples of using these risk quantification factors.

Revisions to the risk quantification factors include updates to the consumer price index (CPI) factors. The CPI is a measure of the change in the prices of consumer goods and services such as food, housing, apparel, transportation, medical care, recreation, education, and communication costs, as well as the cost of miscellaneous goods and services (i.e., personal services, funeral expenses) that are typically purchased by consumers. Essentially, the CPI compares the cost of a sample "market basket" of goods and services in a specific month relative to the cost of the same "market basket" in an earlier reference period.

The US Bureau of Labor Statistics determines CPIs for two populations. One is for urban wage earners and clerical workers (CPI-W), and one is for all urban consumers (CPI-U). The CPI-U represents about 87 percent of the total US population. The inflationary increases indicated by the CPI-U from the mid-2000s through 2019 ranged mostly between 1 and 4 percent annually.

Revisions to Appendix F also include updates to the US claims cost indexes. These factors are useful in the analysis and projection of losses. The US claims cost index updates are completed periodically by Jeremy Pecora and Emily Thompson, consulting actuaries with Willis Towers Watson. A general overview of these updates is provided in Risk Financing Perspectives.

Several applications of the claims cost indexes are described in the discussions on risk quantification. These have also been updated. The discussion on data requirements provides examples of how the indexes are utilized with other trend factors, such as those for loss development. It explains the use of payout profiles and present value analysis for different risks. The discussion on basic loss forecasting methods offers additional examples using the US claims cost indexes for forecasting losses.