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

Compared with the basic chain ladder, which feature is an advantage of the inflation-adjusted chain ladder when claims inflation varies by calendar year?

Its advantage is that it allows explicitly for calendar-year inflation effects. Deflating claims to constant prices means development factors reflect true development patterns rather than inflation, although future inflation must still be assumed and the reserve is only an estimate.

  1. AIt removes the need for any assumption about future experience
  2. BIt guarantees the reserve equals the final settled claims
  3. CIt allows for calendar-year effects, so development patterns are not distorted by changing inflationCorrect
  4. DIt ignores the latest diagonal of data
  5. It eliminates the need for a development factor

Explanation

By deflating to constant prices, inflation along calendar-year diagonals is removed, so factors reflect real development. It still needs assumptions about future inflation and does not guarantee accuracy.

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