Critical time on the reserving agenda when it comes to integrate inflation?


While many insurance companies did not use inflation hypotheses in their reserving process until recently, the current inflation rates estimated by companies -of about 7%[1]– question habits. Some companies even add extra reserves to anticipate future “inflation-linked losses”. The need to integrate it in the technical provisions becomes a factor in the solvency of companies, so now the question becomes the “how”. 

How to integrate the inflation into the reserving process?

Including the inflation into the reserving process requires two major steps: the first one corresponds to the estimation of future inflation, the second one is to integrate this estimation into the calculation of technical provisions. This paper gives food for thoughts for the estimation of future inflation and then emphasizes integration into the calculations, with addactis® IBNRS®.


1st step: Inflation estimation – Food for thoughts

Regarding the estimation of future inflation, the difficulty comes from the characterization of the period, either with sustainably higher prices scenario or with potentially atypical temporary inflation rises. Then, in both cases, the data availability for historical similar events is a second difficulty. These unknowns raise the same question for companies: should we use our own data or market indexes? Financial and actuarial dedicated analyses allow to weigh the two options:

      • The use of own data remains the most rigorous solution. Nevertheless, inflation changing from one type of claim to another, a precise granularity will be needed to properly study the inflation. That could be difficult to obtain: aggregated triangles among line of business will not be enough for instance. The insurers will have to study typical claims, the very definition of which is to be arbitrated inside the company.
      • The market indexes still are the easiest solution because of their availability. The challenge is yet to ensure that these indices are appropriate for the company’s profile.

The answers to these questions are company-related and depend on their data system and economical vision.


Once the inflation rates estimated, having the appropriate tool is key to secure and manage their integration inside the reserving process. With addactis® IBNRS®, we focus on a simple and user-friendly way to deal with those aspects, thanks to a step by step integration.


2nd step: easy step by step inflation integration with addactis® IBNRS®

addactis® IBNRS® already provides solutions to include inflation in the reserving process.

In addactis® IBNRS® the user can add as many inflation vectors as needed (based on CPI, wages, construction costs, spare parts costs…). For these vectors, it is possible to define if the inflation should be applied halfway through the period or at the end of the period, and if the defined rates are set yearly or by development period. Also, the user can add one or more future period if the future inflation rate needs to be specified by year.


Figure 1 – Options available for inflation integration

Once the inflation vector(s) has(have) been created, it(they) can be used inside several IBNRS methods such as the Chain Ladder method, the Munich Chain Ladder method, or the Bootstrap method for example. At the beginning of the method, the user can define the inflation vector to be applied thanks to a combo box. Once selected the inflation is applied to the method input triangle, according to the selected options.


Figure 2 – From uninflated triangles to inflated triangles

Then, the method is calculated based on the triangle with inflation. And finally, when the completed triangle is obtained, the future inflation is applied to the projected data.


Figure 3 – Inflation application to projected data

(In this frame, the past triangle is the same with or without inflation because it represents the exact past amounts, so we do want to show inflation here).

Finally, if several methods have been created with and without inflation, and with different inflation vectors, then it is possible to choose between the multiple ultimates in the Detailed results method.

Monitoring screen_IBNRS_comparison_and_decision

Figure 4 – Monitoring screen for comparison and decision purposes

Recently, the hypothesis that inflation was stable over time was commonly accepted (except for specific cases) because future inflation was de facto approximately equal to the past one. In such conditions, using the Chain Ladder method without an inflation vector was a common practice. But with the current geopolitical environment, the inflation has skyrocketed. Thus, even if past inflation is stable, it is no longer comparable to future inflation. Therefore, companies have to adjust their reserving process and can choose addactis® IBNRS® to do so.

[1] This figure comes from addactis market voice and depends on both business lines and geographical areas, with inflation rates of 7% to 10% in the industrial risk insurance; for motor damage, it typically ranges between 6% and 7%, because of an increase in the spare parts costs (including glass components, also used in the medical field, with high demand during the covid period); regarding bodily injuries on the French market, a very strong inflation was observed (around 15%) linked to the drop of interest rates (impacting annuities costs) and review of compensation calculations.
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