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Inflating claims vs deflating limits

E

E123

Member
Hi,

I understand the concept behind deflating limits, as it saves work in inflating all the claims. But I've done some questions trying to do both ways and see if they match and I'm getting different answers.
For example Q3 in Ch. 15 it's fairly easy to just inflate the claims instead of deflating the limits but the two approaches give different answers. As far as I can tell it's because of the linear interpolation of the exposure curve given. If there's a difference due to interpolation wouldn't it be more accurate to inflate the claims and linearly interpolate to the actual percentages for what we're trying to price?

Thanks
 
It's because you're using the same curve but applying it to inflated (or not) amounts. Effectively you've shifted the curve very slightly in one direction. Either method would be appropriate depending on the assumptions you make. Bear in mind that the curves are approximate anyway (eg they may not be directly relevant, or out of date etc), so it's not a big deal in the great scheme of things.
 
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