In this question, we assume that the level of expenses and profit deduction in each year is to remain at 25% and 5% respectively. How come we then need to apply claims inflation to calculate the claims incurred in each year, rather than assume a constant loss ratio?
Not sure I follow your question....premium volume goes up each year, and inflation affects any outstandings each year, so will affect claims depending on when they are paid?
I think I have just got confused... By 'net growth' does it mean net growth after allowing for claims inflation? I presumed that the premium written in year two would be 120% of premiums written in year one instead of 126% of premiums written in year one. Then in order to keep the loss ratio at 70% the claims incurred in year two would be 120% of the claims incurred in year one. But 'net growth' means after claims inflation? Thanks.
Ah, I see the problem. Depends on how you define net, doesn't it! In the exam, then, I think it's best to say something like 'before/after adjustment for inflation', just to be on the safe side!
