Assessing Inflation Risk in Non-Life Insurance

Inflation risk is of high relevance in non-life insurers’ long-tail business and can
have a major impact on claims reserving. In this paper, we empirically study claims
inflation with focus on automobile liability insurance based on a data set provided
by a large German non-life insurance company. The aim is to obtain empirical
insight regarding the drivers of claims inflation risk and its impact on reserving.
Toward this end, we use stepwise multiple regression analysis to identify relevant
drivers based on economic indices related to health costs and consumer prices,
amongst others. We further study the impact of (implicitly and explicitly)
predicting calendar year inflation effects on claims reserves using stochastic
inflation models. Our results show that drivers for claims inflation can considerably
vary for different lines of business and emphasize the importance of explicitly
dealing with (stochastic) claims inflation when calculating reserves.