InflationandExcessInsuranceMichaelFackler-MENU.pdfVIP

Inflation and Excess Insurance Michael Fackler freelance actuary Munich, Germany michael_fackler@web.de Abstract We study the effect of inflation on insurance covers with retention, e.g. insurance policies with a deductible or reinsurance layers. If we have an inflation of say 3% per year from the ground up, what is the resulting impact on the insured losses? On the contrary, if we observe a rising loss burden affecting an insurance product, can we deduct from this the inflation from the ground up? We will see that the answers to these questions depend heavily on the tail of the loss size distribution – which is an important source of uncertainty as we might not exactly know this tail. The tail-dependency of inflationary effects helps further understand why inflation is not perceived as a major issue in some insurance lines, while being a dramatic problem in other areas, in particular for MTPL reinsurance layers. Keywords Inflation, reinsurance, excess insurance, layer, leverage effect, GPD, Pareto Inflation and Excess Insurance ? Introduction Deductibles (retentions, attachment points) are quite common in insurance, ranging from about 100 Euro in Personal Lines, e.g. Motor Own Damage, to 100.000 Euro and more in industrial insurance. Even higher, in the million Euro range, are the typical retentions of the so-called non-proportional reinsurance treaties. Although of very diverse character these insurance products have one common problem that shall be treated in this paper: If we have an inflation of say 3% per year affecting the insured losses f.g.u. (from the ground up), what is t