Incorporating Explicit General Inflation in the Estimation of the Non-Life Claims Reserve and the Related Risk

Abstract

We consider two possible approaches to the problem of incorporating explicit general (i.e. economic) inflation in the non-life claims reserve estimates and in corresponding reserve SCR, defined - as in Solvency II - under the oneyear view. The actuarial approach provides a simplified solution to the problem, obtained under the assumption of deterministic interest rates and absence of inflation risk premia. The market approach seeks to eliminate these shortcomings by combining a stochastic claims reserving model with a stochastic market model for nominal and real interest rates.

Keywords: Claims reserving, general inflation, claims inflation, stochastic chainladder, reserve risk, nominal interest rates, real interest rates

JEL Classification: G22, G28, D46