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Stochastic Chain-Ladder Reserving with Modeled General Inflation

Author

Listed:
  • Massimo De Felice

    (Department of Statistical Sciences, Sapienza University of Rome, 00185 Roma, Italy)

  • Franco Moriconi

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

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 the corresponding reserve SCR, defined—as in Solvency II—under the one-year view. What we call 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. The problem is studied in details referring to the stochastic chain-ladder provided by the Over-dispersed Poisson model. The application of the two approaches is illustrated by a worked example based on market data.

Suggested Citation

  • Massimo De Felice & Franco Moriconi, 2023. "Stochastic Chain-Ladder Reserving with Modeled General Inflation," Risks, MDPI, vol. 11(12), pages 1-31, December.
    • Handle: RePEc:gam:jrisks:v:11:y:2023:i:12:p:221-:d:1302518
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    References listed on IDEAS

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    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. England, P.D. & Verrall, R.J., 2002. "Stochastic Claims Reserving in General Insurance," British Actuarial Journal, Cambridge University Press, vol. 8(3), pages 443-518, August.
    3. Brydon, D. & Verrall, R. J., 2009. "Calendar Year Effects, Claims Inflation and the Chain-Ladder Technique," Annals of Actuarial Science, Cambridge University Press, vol. 4(2), pages 287-301, September.
    4. Sara Cecchetti & Adriana Grasso & Marcello Pericoli, 2022. "An analysis of objective inflation expectations and inflation risk premia," Temi di discussione (Economic working papers) 1380, Bank of Italy, Economic Research and International Relations Area.
    5. 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.
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