The Brian Hey Prize 2025 had an exceptionally high number of submissions this year, reflecting growing enthusiasm across general insurance, data science and health fields. Here one one of the runners up, Chair of the IFoA’s Claims Inflation Working Cian Creedon, introduces research into adjusting claims’ reserving methods for economic inflation volatility.
Prior to the COVID-19 pandemic, general economic inflation had remained stable (and low) in Western economies for several decades. This stability may have lulled some practitioners into a false sense of security. Indeed, many of us have never known serious inflation volatility in our lifetimes!
Perhaps as a result, standard and generally accepted methods for estimating claims reserves typically considered inflation only implicitly. When faced with a sudden and dramatic increase in general economic inflation in 2021 and 2022, there were challenges in ensuring provisions were sufficiently robust to reflect this phenomenon.
Given the long-tail of liabilities (and the occasionally bemoaned short memory of the market) it may yet be some time before we can ascertain the winners and losers of this scramble… if indeed we ever can. However, it is a goal of the Claims Inflation Working Party to, in a roundabout way, do just this. Equally, with global trade continuing to decouple, inflation volatility may become the new normal. Who is to say?
Accordingly, the focus of the working party’s research for 2024 was on how to adjust claims’ reserving methods for economic inflation volatility.
Our work here built upon our previous research from 2023 – an evaluation of methods used to estimate the inflation present in a cohort of historical claims’ data. This research was conducted on pseudo-claims data designed to consider a number of plausible scenarios. These same data and scenarios were used in our assessment of methods to allow for inflation volatility in claims’ reserving, for consistency.
In particular, we sought to empirically evaluate the various methods noted by the Prudential Regulation Authority and Lloyd’s as being adopted to adjust claims’ reserves for supernormal inflation over 2021 to 2023 using the pseudo data and scenarios previously developed.
Largely, these adjustment methods do not depart heavily from the commonly used trifecta of Chain Ladder, Bornheutter Ferguson and A Priori. Rather, suggested approaches – such as cashflow uplift, inflation-adjusted chain ladder and re-aligning priors – engender two key changes in reserving philosophy:
These two points form the key conclusions of our empirical evaluation of methods for adjusting reserves for volatile inflation. In essence that practitioners should have awareness of the assumptions they use; their provenance; their deficiencies; and be ready to revise them with more accurate data.
Our paper also briefly explores reserving practices commonly used in Australia. Despite a similar legal framework to the UK, regulatory and commercial conditions have led to markedly different reserving practices and methods. These methods are more explicit in their consideration of inflation and so may be superior to standard UK approaches. More research is merited in studying this comparison.
View the paper on the IFoA’s Virtual Learning Environment
