Application of Actuarial Modelling in Insurance Industry (Part-2)
In the previous article, we discussed a brief history of Actuarial Modelling.
Importance of Actuarial Modelling
Nowadays, Actuaries are using their skills in asset management, enterprise risk management, Insurance product and plan design. If we look at the history of the Actuarial profession, Actuaries were mainly doing traditional reserving and Employee benefit works, but with the span of time Actuaries used their skills in other areas also.
If you have read the previous article, you know that Actuarial Modelling methodology was developed using Actuarial skills with advanced mathematics. The idea of Actuarial Modelling is based on the theory of Compound interest.
Every finance student, specifically the person who knows the Time Value of Money must know that the value of Rs. 1 you have will not have the same value tomorrow.
Same as the example given above, Actuarial Modelling allows comparison of financial values at the different time period. In the process of Actuarial Modelling historical data used to solve the problems regarding uncertain future events with high accuracy.
Now, the question arises that why Actuarial Modelling is so important in the Insurance Industry?
I have mentioned the same thing in the previous article that, the Insurance Industry is standing on the assumptions and Actuaries are using Actuarial Modelling to identify, understand, quantify and manage a wide range of uncertain risk.
Actuaries collect the information about possible risks by observing past records on many kinds of risks and the theoretical and practical understanding of how different type of risks behaves.
Overview of Model Preparation
To give an idea of how models are created, I have explained a main process in the below image.
To read more about this, stay tuned with us.
Written by: Kalpesh Agrawal (Actuarial Intern- IIB)
(The article has been written based on the different research conducted by the author.)