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

In the inflation-adjusted chain ladder, projected future incremental claims have been calculated at the base (constant) price level. What must be done next to obtain the estimated future cash payments?

Each projected incremental amount must be multiplied by the assumed inflation index for the calendar year in which it will be paid. This reinflates base-price projections into expected future cash payments. Dividing or leaving them unchanged would understate the claims cost.

  1. ADivide each projected amount by the inflation index for its future calendar year
  2. BMultiply each projected amount by the assumed future inflation index for its calendar yearCorrect
  3. CSubtract the inflation rate from each projected amount
  4. DMultiply all projections by the latest development factor
  5. Leave them unchanged because inflation is already allowed for

Explanation

Projections are in base prices, so they must be reinflated using the assumed future inflation index for the calendar year in which each payment will be made. Dividing would deflate further. Leaving them unchanged ignores future inflation.

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