Producing a solution Flashcards
(9 cards)
Approach of solving the problem is driven by:
o the purpose of the exercise
o the nature of the problem -complexity of the problem
Variability of answer might be assessed by carrying out
o sensitivity analysis
▪ varying individual assumptions
▪ assessing the impact on the results
o scenario testing
▪ changing many assumptions in combination
▪ for example, to look at the many assumptions that might change if the
economy were to move into recession
Actuarial areas that require a model due to uncertainty
premium setting
▪ provisions calculation
▪ assessing reinsurance requirements
▪ valuing guarantees and options
▪ estimating
* future returns
* future mortality improvements
* future discontinuance rates
* future expense levels
* future capital requirements
* future new business levels
A model is a simplified version of reality that:
o captures the essential features of a problem- balance of realism and
simplicity
o aids in understanding – important to be able to communicate the results
effectively
Simplicity is essential for
o ease of application
o verification
o interpretation of results
Various approaches of modeling
o commercial modelling product could be used
o existing model to be reused after modification
o new model could be developed
Merits of each of these approaches will depend on (trade-offs)
o level of accuracy required
o in house expertise available
o the desired flexibility of the model
o number of times model is to be used
o cost of each model
Advantages of in-house
- cheaper
- not a black box
- will account for exact need
- fits it to other models of the company
- staff will understand better
- develop internal expertise
Advantages of external model
- can get it sooner
- extensively tested
- robust (outputs and forecasts are consistently accurate)
-flexible
-can use for other purposes
