Looking at the increases from one year to the next, the expected losses increase by 10% each year but the expected claim payments increase by more than 10% annually. For example, expected losses grow from 750 in year 1 to 1098 in year 5, an increase of 46%. However, expected claim payments grow from 650 in year 1 to 998 in year 5, an increase of 54%. Similarly, the standard deviation of claim payments also increases by more than 10% annually. Both phenomena are caused by a deductible that does not increase with inflation.
A fixed deductible with no maximum limit exaggerates the effect of inflation. Adding a fixed maximum on claim payments limits the effect of inflation. Expected claim payments grow from 610 in year 1 to 819 in year 5, an increase of 34%, which is less than the 46% increase in expected losses. Similarly, the standard deviation of claim payments increases by less than the 10% annual increase in the standard deviation of losses. Both phenomena occur because the benefit limit does not increase with inflation.