Module 4: Actuarial Solutions
Section 1: Module Overview
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Pre-module quiz factoids
- Designing solutions to actuarial problems involves estimating the effect of different courses of action to determine an optimal approach. Modeling aids in this process by helping us to understand the implications of the various approaches in relation to one another.
- Models do not predict the future any more than people do.
- In most situations, it is not necessary to identify all possible outcomes to obtain useful information from the modeling process.
- Certain types of models (e.g., stochastic) attempt to estimate the likelihood of future events but other models (e.g., deterministic) do not, yet they still provide useful information about possible courses of action and their related outcomes.
- The book by Sim Segal highlights practicality as the most critical overriding characteristic of the value-based ERM model. All aspects of the model—inputs, calculations, and output—are to be kept simple, and the sole purpose of supporting decision making should be constantly in mind.
- Read a story from the field (m4s1-02_module4story.pdf) about the importance of the data that goes into designing the solution.
- Preview of Module 4:
- Outline the basic tools and techniques commonly used in the Design the Solution stage of the Control Cycle when designing solutions to actuarial problems.
- Demonstrates the links between the Define the Problem and the Design the Solution stages of the Control Cycle and how the actuarial solution leads to the next stage of the Control Cycle: Monitor the Results.
- Provides practical experience using various techniques for modeling, data collection, selecting appropriate assumptions, validation and reconciliation, through real life examples.
- The following reading (m4s1-01_MicroControl.pdf) introduces the risk control cycle as well as the concept of micro control cycles, which are sub-processes that further define the work completed in a given stage of the Control Cycle.
- Module 4 will lay the groundwork for solving actuarial problems by introducing the basic tools and techniques required for actuarial work. The techniques are applied in many places throughout the Control Cycle as well as in the various micro control cycles.
The areas requiring direct actuarial management include modeling, risk measurement, assumption setting, results monitoring and communication deliveries.
| WHAT does an actuary manage? | WHEN does this activity usually occur? |
| Models | •Design the Solution stage of macro Control Cycle; •Define and Build stages of Model Control Cycle. |
| Risks | •All stages of macro Control Cycle and micro Control Cycles. |
| Assumptions | •Define the Problem and Design the Solution stages of macro Control Cycle; •Assumptions Control Cycle. |
| Results | •Monitor the Results stage of macro Control Cycle; •Monitor stages of micro Control Cycles. |
| Communications | •All stages of macro Control Cycle and micro Control Cycles. |
- Module 4 demonstrates processes that are central to designing effective solutions to typical actuarial problems and exposes you to sample solutions that illustrate the work of an actuary.
After you complete this module, you will be able to:
- Explain how solution design fits into the context of the Control Cycle.
- Identify typical actuarial solutions.
- Describe important aspects of designing solutions.
- Describe and use appropriate modeling techniques to design a solution.
- Identify data needed to design a solution.
- Describe the importance of assumptions when designing a solution.
- Describe the importance of validation and reconciliation techniques when designing a solution.
- Describe the process of quantifying risks in ERM.
- Recall the quote from Module 1 from well-known business strategy thought leader, Peter Drucker:
“If you can’t measure it you can’t manage it.”
“It,” for actuaries, is risk. As covered in Modules 1, 2 and 3, the Control Cycle is a process that provides you with a structure for identifying risks in actuarial problems. Module 4 continues with the Design the Solution stage of the Control Cycle and outlines the measurement tools, techniques and processes commonly used so that the risks can be managed appropriately in the developed solutions.
Assume an actuary has identified and assessed the risks, i.e., successfully defined the problem to be solved. What’s next? The simple response is “solve the problem,” though problem solving in an actuarial context is anything but simple. How does the actuary develop the solution? What information does the actuary need? Section 2 provides answers to these and other questions.