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Inflation implicitly assumed in Chain Ladder

Q

Qayanaat

Member
Hello,

I wanted to ask how can I work out the inflation % that is implicitly being assumed in my chain ladder?

Thanks very much!
 
Hello,

The unadjusted chain ladder assumes that the inflation in the past claims will continue into future claims.

The inflation adjusted chain ladder method is covered in section 3.4 in chapter 15 - Triangulation methods, and there are examples there.

I hope this helps.

Aman
ActEd Tutor
 
Thanks Aman. I understand that; apologies if my question was unclear. I tried to rephrase my question below:

I want to know how can I, mathematically, work out the inflation being assumed in my unadjusted chain ladder (I understand it is assuming inflation in past claims will continue in the future - but how do I work out what that implicit inflation % assumption is?)

Thanks very much!
 
Hi,

This is a rather difficult question to answer easily! In short, there are lots of things that can be going on in a set of triangles. To name just a few:
- different claim mix coming into triangles
- the underwriting cycle
- change in reporting
- change in claims handling

Now, when we are trying to determine the single effect of inflation within these triangles, we are put in a rather sticky position, because we don't know what else is going on in the triangles.

IF we were in a situation where everything was equal, and inflation was the ONLY thing affecting claims and reporting patterns, then we could come up with some sort of view of inflation by looking at the incurred claim amount by the end of year 1, end of year 2, and so on for each year; here the year on year increase can be taken as the inflation. BUT this is simply not what happens in real life, and is rather inaccurate.

I suggest you find a question, and we can use that as basis for discussion?

Aman
ActEd Tutor
 
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