CH:18 Modelling Flashcards

1
Q

How do actuaries use models?

(6)

A
  • Set premiums of charges for insurance products
  • To determine the financing strategy for a benefit scheme
  • Aid risk management
  • Determine the capital requirement
  • Valuing options and guarantees
  • Understanding potential variability of experience
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2
Q

What is a deterministic model?

A

A deterministic model is one where the parameter values are fixed at the outset, so the result of running the model is a single outcome

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3
Q

Q
What are the advantages and disadvantages of a deterministic model? (4/1)

A

++ More readily explainable to a non-technical audience
++ Clearer what economic scenarios have been tested
++ Usually easier to design and quicker to run
++ Users can be blinded by too complex models

  • Requires thought as to what economic scenarios are to be tested
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4
Q

What are the steps of running a deterministic model

(10)

A
  • Specify the purpose of the investigation
  • Collect, group and modify the data
  • Choose form of model
  • Identify assumptions and assign values to these assumptions using past experience and appropriate estimation techniques (basis of model)
  • Construct a model on expected cashflows
  • Check that the goodness of fit is acceptable
  • Try to fit a different model if the first model doesn’t fit well
  • Run the model
  • Perform sensitivity tests
  • Summarise the results
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5
Q

What is a stochastic model?

A

A stochastic model estimates parameters by assigning a probability distribution to them. The model then models the output through simulations which results in a distribution of likely outcomes

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6
Q

What are the advantages and disadvantages of a stochastic model? (2/2)

A

++ Test a wider range of scenarios
++ Assess more complex problems such as guarantees, options and investment mismatching

*- More complex programming
*- Longer to time design, test and build the model

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7
Q

What are the steps of running a stochastic model

(10)

A
  • Specify the purpose of the investigation
  • Collect, group and modify the data
  • Choose suitable density functions for stochastic variables
  • Specify correlation between variables
  • Ascribe values to assumptions that are not stochastic in nature
  • Construct a model on expected cashflows
  • Check that the goodness of fit is acceptable
  • Try to fit a different model if the first model doesn’t fit well
  • Run the model multiple times using a random sample from the chosen density functions
  • Summarise the results showing their distribution
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8
Q

What are they requirements of a good model?

VARIABLE CRISPS CARD

A

V - Valid
A - Adequately documented (e.g., key assumptions should someone take it up later)
R - Rigorous (i.e., produce realistic output under a range of situations)
I - Inputs to parameter values appropriate
A - Arbitrage-free (i.e., take account of business and economic environment)
B - Behaviour reasonable
L - Length of time to run/ cost not too high
E - Easy to understand

C - Communicable workings and output
R - Reflects risk profile of purpose
I - Independent verification of outputs
S - Sensible joint behaviour of variables
P - Parameters allow for all significant features
S - Simple but retain key features

C - Clear results
A - A range of implementation methods
R - Refineable
D - Developable

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9
Q

What factors will affect the approach in which a model is obtained?

(5)

A
  • Level of accuracy required
  • in-house expertise
  • Number of times a model is used
  • Desired flexibility in model
  • Cost associated
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10
Q

What are the operational issues when building a model?

SCARCER FILES

A

S - Simple but retain key features of the model
C - Clear results
A - Adequate documented
R - Range of implementation methods
C - Communicable workings and output
E - Easy to understand
R - Refineable and developable

F - Frequency of cashflows vs run time required
I - Independently verifiable
L - Length of run times not too long
E - expenses not too high
S - Sensible joint behaviour of variables (where variables or assumptions are linked)

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11
Q

What does the risk dicount rate allow for

2

A
  • return required by the company
  • level of statistical risk attached to the cashflows under the particular contract
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