Assessing inflation risk in non-life insurance |
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| Institution: | 1. State Key Laboratory of Rare Earth Resource Utilization, Changchun Institute of Applied Chemistry, Chinese Academy of Sciences, 5625 Renmin Street, Changchun 130022, PR China;2. Chemical Engineering College, Inner Mongolia University of Technology, 49 Aimin Street, Hohhot 010051, PR China;3. University of Chinese Academy of Sciences, Beijing 10049, PR China;1. Vinod Gupta School of Management, Indian Institute of Technology, Kharagpur 721302, India;2. Department of Economics, Trent University, Peterborough, Ontario K9J 7B8, Canada;3. Department of Economics, University of Melbourne, Victoria 3053, Australia;4. Department of Economics, University of Cambridge, Cambridge CB3 9DD, UK;5. School of Business, Monash University Malaysia, Jalan Lagoon Selatan 47500, Malaysia;6. Department of Financial Management, University of Pretoria, Pretoria 0028, South Africa;1. School of Mathematical Sciences, Nankai University, Tianjin 300071, PR China;2. College of Mathematics and Computer Science, Key Laboratory of High Performance Computing and Stochastic Information Processing (Ministry of Education of China), Hunan Normal University, Changsha, 410081, PR China |
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| Abstract: | Inflation risk is of high relevance in non-life insurers’ long-tail business and can have a major impact on claims reserving. In this paper, we empirically study claims inflation with focus on automobile liability insurance based on a data set provided by a large German non-life insurance company. The aim is to obtain empirical insight regarding the drivers of claims inflation risk and its impact on reserving. Toward this end, we use stepwise multiple regression analysis to identify relevant drivers based on economic indices related to health costs and consumer prices, amongst others. We further study the impact of (implicitly and explicitly) predicting calendar year inflation effects on claims reserves using stochastic inflation models. Our results show that drivers for claims inflation can considerably vary for different lines of business and emphasize the importance of explicitly dealing with (stochastic) claims inflation when calculating reserves. |
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| Keywords: | Separation method Claims inflation Regression analysis Simulation Vasicek |
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