discounting vs. inflation

Discussion in 'SP7' started by Smith, Jun 14, 2020.

  1. Smith

    Smith Very Active Member

    The 1st paragraph, in page 15, Chapter 14, refer to the discounting rate, it's said that "'s important to consider the consistency between the economic inflation assumptions and the discount rate......" How to understand this? Does it mean discounting treatment can be viewed as a way for including inflation into the estimates? In another word, the discounting rate may incorporate investment income and inflation factors, doesn't it?
  2. Darren Michaels

    Darren Michaels ActEd Tutor Staff Member

    No I would not interpret the statement in that way.

    You discount your estimates based on your expected investment return on the assets backing your liabilities / reserves.

    Investment returns would normally move in line with changes in various factors, including inflation.

    All the sentence is saying is that any assumptions your choose for investment returns and claims inflation in your reserving calculations should be broadly consistent with each other.
  3. Smith

    Smith Very Active Member

    understood, thanks!

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