Question 12.8

[amused942]

I don't understand the solution to this.

I understand the first step which is to discount back the £267 to mid-2009 terms, using the 1/2% per month inflation rate, to get £254.

When calculating the monetary amount of the average claims payment in the new rating era, the calc is given as 254 x (1.02^2.5) x (1.10^2.5) x 1.10^(10/12) = £367

Why should the last term be necessary ("building in the claims inflation for the 10 months between occurrence and settlement") when we have already allowed for inflation between mid-2009 and end-2011 (penultimate term) ?

[I'm using the 2011 verison of notes, in case the calendar years in example have changed since]

 

[iActuary]

Adjustment for inflation between mid-2009 and end-2011 is for the claims incurred cost itself (assuming no delays such as reporting and settlement).

To have the same "power" of compensation (i.e. claims payment), it is necessary to adjust for the inflation and/or trend from occurrence to settlement.

For instance, if the final (trended and inflated) compensation is a cup of Starbucks coffee, the payments made last year and this year are very likely to be different, due to inflation.