IAI Actuarial Core Principles · Business Management · Issues and challenges in each main practice area
A general insurer in India sells motor own-damage cover. Over two years its claims inflation, driven by rising spare-part prices, has exceeded the inflation allowed for in its pricing. Which challenge is the pricing actuary most directly facing?
The pricing actuary faces inadequate premium rates. Spare-part inflation pushes claim costs above the trend assumed in pricing, so premiums fall short of claims and expenses. The other options concern life, annuity or guarantee risks, not general insurance claims inflation.
- APremium rates have become inadequate because claim cost trends were underestimatedCorrect
- BPolicyholders are lapsing because surrender values are too low
- CReserves for long-term annuities are too high because of longevity improvement
- DInvestment guarantees are out of the money because of falling equity markets
- Mortality rates in the portfolio are deviating from the standard table
Explanation
If claim costs rise faster than the trend assumed in pricing, premiums collected fall short of claims and expenses, so the rate is inadequate. The other options relate to life, annuity or investment-guarantee business and do not describe motor claims inflation.
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