Compulsory Third Party Insurance: Methods of Making Explicit Allowance for Inflation

An inflation index is essential when constructing claim payment models from past payment data, and when projecting these results to give estimates of the provisions for outstanding claims anti of necessary premiums. This paper examines the choice of inflation indices for compulsory third party insurance in two Australian states. Two different indices, one based on average weekly earnings per employed male unit and the other based on consumer prices, were tested. The index based on average weekly earnings was considered to be superior in that past claim payment data, together with this index, gave reasonably stable claim payment models. Some experiments were made for an actual office to illustrate time effects of different inflation rate assumptions.