Academic Editor: Tomasz J. Kozubowski
Copyright © 2009 Vytaras Brazauskas et al. This is an open access article distributed under the
Creative Commons Attribution License, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
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.