Wed 19 Mar 2025 - In June 2023, the Prudential Regulation Authority (PRA) issued UK general insurance chief actuaries with a follow-up report to its October 2022 thematic review In this report, it was noted that many insurers had yet to observe recent supernormal economic inflation manifest itself as claims inflation, particularly in third-party casualty lines.
Claims inflation may be disconnected from economic inflation in many lines of business. But this is considered to be unlikely given insurance’s purpose in rectifying a financial loss. Rather, it is likely that claims inflation may lag economic inflation for certain lines.
A total disconnect is highly unlikely. But the link between economic and claims inflation can vary from being reasonably apparent (such as in first party motor property) to less apparent (such as in medical malpractice). The question of how (and indeed when) best to allow for the effects of supernormal economic inflation (and periods of heightened claims inflation generally) in general insurance actuarial practices becomes challenging.
To answer the question as to how economic inflation impacts claims inflation, we first need a solid understanding of what claims inflation has been present in our data historically. This then becomes the pivotal focus of this paper, namely:
For a given cohort of claims data, how do we best gauge the level of historical claims inflation?
In line with the working party’s stated purpose, the paper’s objective is to provide an introductory guide to actuarial practitioners in their attempts to answer this question. The paper aims to evaluate and provide guidance on some common methods that may be used to estimate inflation present in historical data.
Claims inflation estimation: a practical guide for historical data (PDF, 400 KB)
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