Hi, I have a question relating to the inflation adjustment (be it past or future).... As shown in the notes, the adjustment is performed through transforming the diagonal (calendar year) incremental claims into, usually, latest year's price. However, I have found it weird as I would have thought that we should be adjusting the rows instead of the diagonal... Probably an example is clearer.. Assuming there are 3 incurred years (2004 - 2005), and each year there are equivalent incremental claims of S$100 in each development year. Hence, the incremental diagonal would look like below: 0 1 2 2004 100 100 100 2005 100 100 2006 100 Assuming 10% inflation each year, adjusted incremental claims is then below: 0 1 2 2004 121 110 100 2005 110 100 2006 100 However, my thought is that each row contains claims that were incurred in the year. And believe that an incurred claim (say incurred 2004) of an amount of S$100 would ultimately be paid out in S$100 irregardless of which year the amount is settled (i.e. a claim that was incurred in 2004 but paid in 2006 should be in 2004's price). This suggested that the highlighted figure above is expressed in 2004's price instead of 2006's price even though the claim is settled in 2006. Hence my suggested incremental claims triangle for inflation is below instead: 0 1 2 2004 121 121 121 2005 110 110 2006 100 Greatly appreciate your help and many thanks in advance!!!
Hi Naruto If I recalled correctly, the purpose of indexing the historical increments is to bring the triangle to the current valuation. So an increase of 100 in 2004 is equivalent to an increment of 121 in the year 2006 (current year). That is why the diagonal (from bottom left to top right) is unadjusted because these figures are in the year 2006. Does it make sense?
