CIA.MODELS

Question 1

define ‘model’

Answer 1

a practical representation of relationships among entities using FEMS [Financial, Economical, Mathematical, Statistical] concepts

Question 2

what are the elements of a ‘model’ (3)

Answer 2

SIR:
- model Specification
- model Implementation
- model Run

Question 3

define ‘model specification’

Answer 3

a description of the parts of a model and their interactions (includes data, assumptions, methods, entities, events)

Question 4

define ‘model implementation’

Answer 4

the systems that perform the calculations (computer programs, spreadsheets,…)

Question 5

define ‘model run’

Answer 5

the inputs/outputs of the implementation

Question 6

define ‘model risk’

Answer 6

the risk that the user will draw inappropriate conclusions due to shortcomings of the model or its use

Question 7

how can model risk be measured (2)

Answer 7

• severity of model failure
• likelihood of model failure

Question 8

describe considerations in assessing the severity of model failure (3)

Answer 8

• Financial significance (Ex: severity is higher if estimating a major balance sheet item)
• Importance of model (Ex: severity is lower if multiple models are being used)
• Frequency of use of model (Ex: severity is higher if model is used frequently)

Question 9

describe considerations in assessing the likelihood of model failure (4)

Answer 9

• Complexity (Ex: higher complexity means higher likelihood of misuse of model)
• Expertise (Ex: non-expert users may not understand model limitations)
• Docs (Ex: bad docs means high likelikhood of model failure!!!)
• Testing (Ex: inadequate testing means high likelihood of model failure)

Question 10

identify the steps an actuary should take before using a new model (4)

Answer 10

review specification, validate implementation, deal with limitations, keep documentation

Question 11

how should an actuary evaluate an existing model that’s being used in a NEW WAY

Answer 11

• check that the initial model was properly validated
• review limitations in the new application that may not have been relevant in the initial application

Question 12

how should an actuary evaluate a model approved for use BY OTHERS

Answer 12

• actuary should review & approve the initial validation report

Question 13

how should an actuary evaluate a model OUTSIDE ACTUARY’S EXPERTISE

Answer 13

• make a reasonable attempt at understanding the model’s…
  
  • specifications
  • validation (extent to which experts were involved)
  • risk-rating
  • complexity
  • control framework

Question 14

compare uni-dimensional model risk-rating with two-dimensional rating

Answer 14

uni-dimensonal approach:
- rating from 1-20 (20 is high)
- based on financial significance, complexity, expertise of users, docs
two-dimensional approach:
- assessed separately for severity & likelihood of failure
- final rating is a balance of these