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A Three-Factor Market Model for Incorporating Explicit General Inflation in Non-Life Claims Reserving

Author

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  • Franco Moriconi

    (Department of Economics, University of Perugia, 06123 Perugia, Italy)

Abstract

In a recent paper “Stochastic Chain-Ladder Reserving with Modeled General Inflation”, the effects of modeled general inflation on non-life claims reserving were studied using, along with the so called “market approach”, a stochastic two-factor market model, characterized by deterministic expected inflation. In the present paper, we repeat the same study, again with the market approach, using a three-factor market model which extends the two-factor model by including stochastic expected inflation. After detailing the theoretical model and estimating the relevant parameters on the same market data used in “Stochastic Chain-Ladder Reserving with Modeled General Inflation”, we repeat the application to claims reserving presented in that paper and compare the results obtained with the two models. With these data, it is found that the inclusion of stochastic expected inflation produces a non-negligible increase in the reserve solvency capital requirement under the one-year view.

Suggested Citation

  • Franco Moriconi, 2023. "A Three-Factor Market Model for Incorporating Explicit General Inflation in Non-Life Claims Reserving," Risks, MDPI, vol. 11(10), pages 1-32, October.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:10:p:174-:d:1255161
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    References listed on IDEAS

    as
    1. John C. Cox & Jonathan E. Ingersoll Jr. & Stephen A. Ross, 2005. "A Theory Of The Term Structure Of Interest Rates," World Scientific Book Chapters, in: Sudipto Bhattacharya & George M Constantinides (ed.), Theory Of Valuation, chapter 5, pages 129-164, World Scientific Publishing Co. Pte. Ltd..
    2. Hull, John & White, Alan, 1990. "Pricing Interest-Rate-Derivative Securities," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 573-592.
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    Cited by:

    1. Massimo De Felice & Franco Moriconi, 2023. "Stochastic Chain-Ladder Reserving with Modeled General Inflation," Risks, MDPI, vol. 11(12), pages 1-31, December.

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