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Inflation Adjusted Chain Ladder Method

Author

Listed:
  • Bente Corneliu Cristian

    (Universitatea din Oradea,)

  • Gavriletea Marius Dan

    (Facultatea de Business,)

Abstract

Claims reserving is one of the basic actuarial tasks in the insurance industry. Based on observed claims development figures (complete or incomplete development triangles or trapezoids) actuaries have to predict the ultimate claim amount for different lines of business as well as for the whole insurance portfolio. In order to fulfil the commitments at any time arising from contracts insurance, insurance companies are required to establish and maintain certain technical reserve. As a result, these technical reserves have a major role in ensuring stability, the financial insurance companies being completely necessary to estimate as correctly. Also the technical background operation is an essential part of insurance companies as related funds are invested and earnings are an important source of income.Calculation of technical provisions is achieved by actuarial methods and their overvaluation or underestimation distorts business of insurers. The overvaluation reserves leads to reduced solvency margin and the company may be unable to make to commitments at a time, and undervaluation influence and profit taxes paid may be higher.The inflation-adjusted Chain-Ladder methodology incorporates an explicit allowance for past and future inflation. This method requires a triangle of paid claims and credible estimates of past and future inflation assumptions. Incremental payments in each calendar period are adjusted by past inflation to the same money terms. This way it assumes that the inflation-adjusted development is stable – so that the Chain-Ladder assumption can hold. Then the incremental values are restated again as a cumulative development triangle and the Chain-Ladder method is applied. Finally, as the payments will actually be paid in the future, incremental cash flows will be adjusted by the future inflation assumption to allow for this.All the economic actors active in a market consider and analyse permanently the evolution of the business cycle by using available data in order to make rational choices in their business decision. In other words, the decision making relies in all its phases and in all circumstances on data, here including statistical data.It is important for an insurance company that, through its programming for how they will achieve security, aware of the risks that may arise for them commensurable, ie probabilistic estimate them, so things will market the normally.In this way, for damage or for those that are outstanding or unreported or random propose a methodology based on which one who engages in this way to know what to do.

Suggested Citation

  • Bente Corneliu Cristian & Gavriletea Marius Dan, 2015. "Inflation Adjusted Chain Ladder Method," Annals of Faculty of Economics, University of Oradea, Faculty of Economics, vol. 1(2), pages 370-379, December.
    • Handle: RePEc:ora:journl:v:1:y:2015:i:2:p:370-379
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    References listed on IDEAS

    as
    1. Enrique de Alba, 2002. "Bayesian Estimation of Outstanding Claim Reserves," North American Actuarial Journal, Taylor & Francis Journals, vol. 6(4), pages 1-20.
    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. 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.
    4. David Scollnik, 2001. "Actuarial Modeling with MCMC and BUGs," North American Actuarial Journal, Taylor & Francis Journals, vol. 5(2), pages 96-124.
    5. Marjorie Rosenberg & Virginia Young, 1999. "A Bayesian Approach to Understanding Time Series Data," North American Actuarial Journal, Taylor & Francis Journals, vol. 3(2), pages 130-143.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    claims reserving; 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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