Chapter2: Principles of Actuarial Modelling

Question 1

What are the advantages of using models in actuarial work?

Answer 1

Models allow us to:
- Investigate future behavior in compressed time.
- Study stochastic outcomes, like using Monte Carlo simulations.
- Compare multiple scenarios effectively.
- Consider scenarios that are not feasible in practice.
- Control experimental conditions to reduce result variance without affecting the mean.

Question 2

What are the disadvantages of using models in actuarial work?

Answer 2

• Models can be time-consuming and expensive to set up.
• Stochastic models require many simulations to be effective.
• Models are more useful for comparing input variations than optimizing output.
• They may give a false impression of accuracy and reliability.
• Results depend on data quality, which may be inaccurate or unreliable.
• Users may not fully understand the model’s workings or limitations.
• Models may not capture real-world situations accurately enough.