Victoria Stachowski and Alice Underwood (Second Prize)
Abstract
As assumptions underlie every aspect of actuarial calculations, actuaries must be aware of the assumptions they are using and understand their importance and the possible effects of changing assumptions on the results of their calculations. This paper explores the nature of assumptions in: (i) mathematical models, (ii) data selection, (iii) actuarial methods, and (iv) the business environment. We examine reasons for making assumptions such as convenience, tradition, indications in the data, or lack of data. In addition, we discuss (i) how actuaries can judge whether these reasons are sufficient; (ii) methods that can help actuaries quantify the impact of their assumptions, such as what-if scenarios, simulation, and stress testing; and (iii) the circumstances for which testing is most important.
Key words and phrases: hypotheses, postulates, methods, standards, models, and analysis.
Victoria Stachowski
Zurich Financial Services,
Mythenquai 2,
8022 Zurich
SWITZERLAND
Alice Underwood
Zurich Re (North America)
One Chase Manhattan Plaza
New York NY 10005
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