CIA - Models Flashcards
Define ‘model’.
It is a practical representation of relationships among entities, using FEMS concepts:
- Financial
- Economical
- Mathematical
- Statistical
What are the elements of a model? (3) (hint: SIR)
- model Specification
- model Implementation
- model Run
Define ‘model specification’.
It is a description of the parts of a model and their interactions, including:
- data
- assumptions
- methods
- entities
- events
Define ‘model implementation’.
It is the systems that perform the calculations:
- computer programs
- spreadsheets
- etc.
Define ‘model run’.
It is the inputs and outputs of the implementation.
Define ‘model risk’.
It is the risk that the user will draw inappropriate conclusions due to the shortcomings of the model or its use
What is the main distinction between a calculation and model?
That a model requires more documentation:
- how it was chosen
- how it is used
Why is there always risk in using a model?
It is because a model is a simplification of reality.
How can model risk be measured? (2)
- severity of model failure
- likelihood of model failure
Describe the considerations in assessing the severity of a model failure. (3)
- financial significance (eg: the severity is higher if estimating a major balance sheet item)
- importance of model (eg: severity is lower if multiple models are being used)
- frequency of use of model (eg: severity is higher if model is used frequently)
Describe the considerations in assessing the likelihood of model failure. (4)
- complexity (eg: higher complexity means a higher likelihood of misuse of the model)
- expertise (eg: non-expert users may not understand the model’s limitations)
- documentation (eg: bad documentation means that there is a higher likelihood that there will be a model failure)
- testing (eg: inadequate testing means that there is a higher likelihood of model failure)
Does the actuary have more control over the SEVERITY or the LIKELIHOOD of model failure? Justify your answer.
The actuary has more control over the LIKELIHOOD:
it is within the actuary’s control to:
- CHOOSE a more reliable model
- TEST the model more thoroughly
Identify the steps an actuary should take before using a new model. (4)
- review specifications
- validate implementation
- deal with the limitations
- keep documentation
Describe what an actuary does when reviewing a model’s specifications. (3) (hint: DAMs)
Verify that the :
- DATA fits the model requirements
- METHODS are sound
- ASSUMPTIONS are appropriate
Describe what an actuary does when validating a model’s implementations. (5)
- compare with other tested models
- maintain a set of test cases
- backtesting (testing with historical data where you already know the answer)
- run an entire live file through successive version of the model (for models with a higher risk-rating)
- peer review of testing procedure
