Chapter 10

Answer 1

A model risk, that the model may not be appropriate or may contain errors l A parameter risk, that the parameters used with the model may not adequately reflect the future relevant experience, even though the underlying model may be appropriate
l A random fluctuations risk, that the actual future experience may not correspond with the model and parameters adopted, even though these are appropriate. No matter how good your model or assumption setting, random fluctuations will still arise as random variables are being used. The smaller the number of covered lives, the greater this random variation will be.

Answer 2

Data risk Incorrect data may be used to calculate the value of future benefits. Policy data is kept by a benefit provider on issued policies. This data may be inaccurate if: l Data collected was inaccurate, inadequate, or incomplete.
l Model points selected do not reflect the characteristics of the actual portfolio. This is also model risk.
Given the importance of this data, validation checks would normally be carried out on the quality of the data by the actuary.

Answer 3

Data risk Incorrect data may be used to calculate the value of future benefits. Policy data is kept by a benefit provider on issued policies. This data may be inaccurate if: l Data collected was inaccurate, inadequate, or incomplete.
l Model points selected do not reflect the characteristics of the actual portfolio. This is also model risk.
Given the importance of this data, validation checks would normally be carried out on the quality of the data by the actuary.