Hi there, In this question we are considering the allowance for inflation and investment returns in pricing. 1) The solution says that we should discount the claim payments using the real investment return. Why? Doesn't this assume that claim inflation is price inflation? 2) There is no mention of claims inflation, besides for the appropriate matching of liabilities. 3) There is no mention of expenses inflation. 4) There is no mention for allowance for the delays in receiving the premium
1) yes, i think you're right. Perhaps they're more concerned with inflation over and above the 'normal' amount, since they can put premium rates up over time? 2) and 3) it mentions something about a third of the way down, but yes, it's not quite clear whether this refers to assets or liabilities (and then presumably this is both claim and expense liabilities). 4) single premium so wouldn't expect this to be a big issue.
