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Inflation Adjusted Chain Ladder Method As A Challenge To Actuaries

Author

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  • Corneliu Cristian Bente

    (Department of Finance, Faculty of Economic Sciences, University of Oradea, Oradea, Romania)

Abstract

The Solvency II directive establishes a revised set of capital adequacy rules for insurance and reinsurance undertakings in the EEA. The starting point for assessing the available capital of an undertaking is to value its assets and liabilities. The liabilities of insurance undertakings include the technical provisions which constitute a significant proportion of their balance sheets. Under Solvency II the projection of run-off triangles is one of the allowed methods for valuing the technical provisions for non-life insurance business. This paper demonstrates how the Inflation-Adjusted Chain Ladder Method, a simple form of run-off triangle methods, can be used by a non-life insurer in determining the technical provisions for outstanding claims. The key assumption underlying this method is that, for each origin year, the amount of claims paid, in real terms, in each development year is a constant proportion of the total claims, in real terms, from that origin year. Activity and actuarial expertise is indispensable assurance business. Actuarial techniques in insurance helps strengthen prudentially insurance supervision, quality improvement and financial responsibilities of insurers and other professional participants of the financial market, increasing the role of risk management in insurance, strengthening capacity interdependence between auditors and actuaries in insurance, increase customer confidence, market development and compliance with European standards. Insurance companies must ensure that the assumptions used in determining technical reserves, own funds and the Solvency Capital Requirement converge. The Chain-Ladder Inflation Adjusted Method involves taking inflation into account inflation index applied to claims from previous years and the forecast index applied estimated damage. The Basic Chain-Ladder Method data applied to the damages updated inflation index to estimate damages to be paid in the coming years, as applicable index forecasted to convert that amount into monetary values for each year. So this method differs from the Basic Chain Ladder Method that the data are expressed in current terms, while the basic method using data in constant terms.

Suggested Citation

  • Corneliu Cristian Bente, 2017. "Inflation Adjusted Chain Ladder Method As A Challenge To Actuaries," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 157-165, December.
    • Handle: RePEc:ora:journl:v:1:y:2017:i:2:p:157-165
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    References listed on IDEAS

    as
    1. Cairns, Andrew J. G., 2000. "A discussion of parameter and model uncertainty in insurance," Insurance: Mathematics and Economics, Elsevier, vol. 27(3), pages 313-330, December.
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    3. Verrall, R.J., 1990. "Bayes and Empirical Bayes Estimation for the Chain Ladder Model," ASTIN Bulletin, Cambridge University Press, vol. 20(2), pages 217-243, November.
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    More about this item

    Keywords

    claims; chain-ladder method; damages; premium rates;
    All these keywords.

    JEL classification:

    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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