A Three-Factor Market Model for Incorporating Explicit General Inflation in Non-Life Claims Reserving

Franco Moriconi ()
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Franco Moriconi: Department of Economics, University of Perugia, 06123 Perugia, Italy

Risks, 2023, vol. 11, issue 10, 1-32

Abstract: In a recent paper “Stochastic Chain-Ladder Reserving with Modeled General Inflation”, the effects of modeled general inflation on non-life claims reserving were studied using, along with the so called “market approach”, a stochastic two-factor market model, characterized by deterministic expected inflation. In the present paper, we repeat the same study, again with the market approach, using a three-factor market model which extends the two-factor model by including stochastic expected inflation. After detailing the theoretical model and estimating the relevant parameters on the same market data used in “Stochastic Chain-Ladder Reserving with Modeled General Inflation”, we repeat the application to claims reserving presented in that paper and compare the results obtained with the two models. With these data, it is found that the inclusion of stochastic expected inflation produces a non-negligible increase in the reserve solvency capital requirement under the one-year view.

Keywords: claims reserving; general inflation; claims inflation; stochastic chain-ladder; reserve risk; stochastic expected inflation; nominal interest rates; real interest rates (search for similar items in EconPapers)
JEL-codes: C G0 G1 G2 G3 K2 M2 M4 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:gam:jrisks:v:11:y:2023:i:10:p:174-:d:1255161

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