Inflation

Document description

When an underwriter considers a revision of premium rates for a particular class of business he is forced, either implicitly or explicitly, to make a number of assumptions regarding the future progress of the account. If he were able accurately to predict each of the relevant variables he would be able to assess exactly the eventual profit or loss that would emerge. Unfortunately many of these assumptions are subject to considerable variability and these uncertainties form the principal reason for the maintenance of solvency reserves. In recent times in the UK one of the most far reaching of these assumptions has concerned inflation. This directly affects claim costs and expenses and less directly the level of reserves and the return on investments. This note examines the problems of assessing inflation and the extent and significance of the potential errors in its estimation.