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

In the inflation-adjusted chain ladder method applied to a cumulative or incremental claims run-off triangle, what is the first step before development factors are calculated?

The first step is to restate all incremental claims at a common price level using an assumed claims inflation index. Only after this adjustment are cumulative figures and development factors calculated, so that inflation effects do not distort the pattern of development.

  1. AConvert all incremental claim amounts to a common price level using an assumed claims inflation indexCorrect
  2. BMultiply each row by the number of development years remaining
  3. CRemove the latest diagonal from the triangle and discard it
  4. DApply the Black-Scholes formula to the ultimate claim amounts
  5. Divide each incremental claim by the cumulative total of its row

Explanation

The inflation-adjusted chain ladder first restates incremental claims in constant prices using an inflation index. Standard chain ladder factors are then applied to the deflated cumulative data. The other options are not steps of the method.

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