When Inflation Causes No Increase in Claim Amounts. (14th July 2009)

• Record Type: Journal Article
• Authors: Brazauskas, Vytaras; Jones, Bruce L.; Zitikis, Ričardas
• Other Names: Kozubowski Tomasz J. Academic Editor.
• Is Part Of: Journal of probability and statistics. Volume 2009(2009)
• Publication Date: 2009-07-14
• Subjects: Probabilities -- Periodicals; Mathematical statistics -- Periodicals; Mathematical statistics; Probabilities; Periodicals; 519
• DOI: 10.1155/2009/943926
• Languages: English
• ISSNs: 1687-952X

Abstract

Abstract : It is well known that when (re)insurance coverages involve a deductible, the impact of inflation of loss amounts is distorted, and the changes in claims paid by the (re)insurer cannot be assumed to reflect the rate of inflation. A particularly interesting phenomenon occurs when losses follow a Pareto distribution. In this case, the observed loss amounts (those that exceed the deductible) are identically distributed from year to year even in the presence of inflation. Nevertheless, in this paper we succeed in estimating the inflation rate from the observations. We develop appropriate statistical inferential methods to quantify the inflation rate and illustrate them using simulated data. Our solution hinges on the recognition that the distribution of the number of observed losses changes from year to year depending on the inflation rate.