Unexpected increases in inflation cause loss rates to increase more for long-tail risk than for short-tail risks.

Question

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Long-tail risks, such as those in insurance or healthcare industries, involve claims that can take years or even decades to fully develop and settle. In contrast, short-tail risks, such as those in the automotive or consumer goods industries, involve claims that are typically resolved within a shorter timeframe. Inflation can lead to higher costs for both types of risks, but in the case of long-tail risks, the effects of inflation can accumulate over time, resulting in greater loss rates. This is because long-tail risks tend to be more sensitive to changes in interest rates and other economic factors, which can be affected by inflation.

Unexpected Increases in Inflation Cause Loss Rates to Increase More