• Kalpesh Agrawal

Actuarial Model

I have published the related article named "Application of Actuarial Modelling in Insurance Industry" previously.

You can read all parts of these articles from the link given below:

➡ Application of Actuarial Modelling in Insurance Industry (Part-1): Click here

➡ Application of Actuarial Modelling in Insurance Industry (Part-2): Click here

➡ Application of Actuarial Modelling in Insurance Industry (Part-3): Click here

This article is the part of the Actuarial Definitions series.

After having some research, I have found the most comprehensive definition of models in insurance, written by Jewell (1980).

"A model is a set of verifiable mathematical relationships or logical procedures which is used to represent observed, measurable real-world phenomena, to communicate alternative hypothesis about the cause of the phenomena, and to predict the future behaviour of the phenomena for the purpose of decision making."

Insurance companies are using Actuarial modelling extensively to manage their risk and to predict the likeliness of any event that causes a loss to the company.

In a layman term, Actuarial modelling is a simplified representation of the relationships between the real world variables, unexpected events, entities, and various risk factors using complex mathematical, statistical, economic, or financial equations and concepts. These relationships are used to predict the effect of past incidents in the future.

A model is a combination of 3 components:

  1. An information input component: In one of the previous articles on "Application of Actuarial Modelling in Insurance Industry", I have shown the whole process of Actuarial modelling. The first step is to make assumptions, decide the parameters and freeze the data for the modelling purpose.

  2. A Processing component: This is the component in which all inputs are converted into assumptions.

  3. An Output component: After testing variables and making assumptions, these assumptions are converted into useful business information.

Also, one more thing one must have to notice that, Actuarial Modelling must need to be updated frequently because there are so many internal and external factors, which may affect the business quality.

Written by: Kalpesh Agrawal (Actuarial Intern - IIB)

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