A UK company writes a commercial motor fleet policy for a company Y in Freedonia, which has suffered from high inflation in the last few years. You have been given the list of the five losses notified to Y in the last few years.

As part of your pricing exercise, you have to prepare appropriate input for your severity analysis, and you revalue all losses to the relevant date and convert all claim amounts from Freedonian dollars to pounds. Some information (not all of it useful) on loss inflation and exchange rates is provided in the table below.

Claim ID Loss date Original currency Claim amount

(FRD)

Loss inflation index at loss date Exchange rate at loss date

(value of 1 FRD in GBP)

Claim_1 11/1/2008 FRD 99,799 102 0.0891 Claim_2 3/3/2009 FRD 2,665,226 117 0.0724 Claim_3 3/10/2009 FRD 510,466 133 0.0581 Claim_4 15/6/2011 FRD 432,408 180 0.0222

• Explain what loss inflation is and why loss inflation for motor losses differs from consumer price inflation.
• Explain (very briefly) what inflation indices are relevant for motor bodily injury losses, and why a combination of these indices may not suffice to account for the observed loss inflation.
• Revalue all losses above and convert to pounds as necessary to price a motor policy that incepts on 1 July 2013.
• Explain why you converted the claim amounts to pounds in the way you did, given that this is part of a pricing exercise.