Hi Tutors kindly explain the basis of how we compute inflation to 2012 rates for both table 1 and 2 respectively which have assumptions of accounting yr for table 1 and underwriting yr for table 2 respectively. Thanks
You need to inflate from the average date of claim (assuming no reporting or settlement delays) relating to the loss ratio you are using to the average date of claim for the period that you wish to apply the loss ratio to. From the question we want to calculate the reserves on an accident (1-year) year basis for the 2012 accident year, bearing in mind that the company only started writing business on 1 July 2012. Assuming the risk is uniform over the year, then the average date of claim for the 2012 accident year will be 1 October 2012. This is the date we need to inflate to. As we do not know whether the loss ratios provided are on an accident or underwriting year basis, the Examiners have done the calculations both ways. Table 1 is assumes they are on an ACCIDENT year (not accounting year) basis. For the 2008 accident year for example, the average date of claim is 1 July 2008. So we need to inflate the loss ratio by 4.25 years. The Examiners appear to have used 7.5% inflation. Thus (1.075)^4.25=136%. Table 2 is assumes they are on an underwriting year basis. For the 2008 underwriting year for example, the average date of inception is 1 July 2008. Assuming a six month delay from inception to claim, the average date of claim will therefore be 31 December 2008. So we need to inflate the loss ratio by 3.75 years. Again using 7.5% inflation we have (1.075)^3.75=131%.
