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IAI Actuarial Core Principles · Economic Modelling · Run-off triangles

A claims run-off analysis shows that the average cost per claim has risen sharply in recent calendar years, while claim numbers are stable. Which practical issue does this most directly threaten for a basic chain ladder applied to cumulative paid claims?

Rising claims inflation acts along calendar-year diagonals and breaks the assumption that development patterns are stable across accident years. Chain ladder implicitly projects past inflation forward, so a sharp change in inflation makes the estimated factors and reserves unreliable.

  1. AThe assumption that the development pattern is stable across accident years, because calendar-year inflation distorts the factorsCorrect
  2. BThe assumption that claim numbers follow a Poisson distribution
  3. CThe requirement that the triangle be square
  4. DThe requirement that tail factors equal one
  5. The assumption that premiums are paid at the start of the year

Explanation

Calendar-year effects such as claims inflation lie along the diagonals of the triangle. Basic chain ladder assumes stable development across accident years and implicitly assumes past inflation continues, so a changing inflation rate distorts the factors and the projection.

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