3-41 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 liabilities that have a long settlement period, are more sensitive to changes in inflation compared to short-tail risks, which have a shorter settlement period. This is because unexpected increases in inflation can increase the cost of settling long-tail claims, leading to higher loss rates for insurers. Short-tail risks, on the other hand, are settled quickly and therefore may not be as affected by inflation.

3-41 Unexpected Increases in Inflation Cause Loss Rates to Increase