## Definition ==Inflation== in an insurance context refers to the increase in loss amounts over time. If the loss $X$ is subject to an inflation rate $r$, the inflated loss becomes $X(1 + r)$. Inflation affects expected payments because it shifts the loss distribution upward, potentially changing how deductibles, coinsurance, and benefit limits interact with the loss. > [!example]- Last year's losses had mean $\$5{,}000$ and a $\$1{,}000$ deductible. With 10% inflation and no change in the deductible, how does the expected payment change? > After inflation, the mean loss is $5{,}000 \times 1.10 = \$5{,}500$. The deductible stays at $\$1{,}000$, so it now covers a smaller fraction of losses. The expected payment increases by more than 10% because inflation both raises the average loss and reduces the effective impact of the fixed deductible.