Method: Using a random-walk time series model for inflation, we can estimate the variance of a stream of inflation-sensitive payments. The same calculations can be performed to estimate the covariance between two streams of payments.
Results: Formulas are presented for estimating and calculating the variance in reserves attributable to inflation. All of these calculations are performed analytically, without requiring simulation.
Conclusions: Covariance between reserve segments due to common sensitivity to inflation can be easily modeled. This provides a convenient and intuitive way of calculating dependence between reserve segments in order to estimate variance at a company level.
Availability: Excel spreadsheet examples of the calculations described in this paper are available from the author.
Keywords: Inflation, Reserving, Time-Series, Correlation, Covariance
