Spotlighting Trends-Predictive Modeling, Economic Capital Modeling & Catastrophe Modeling

Spotlighting Trends-Predictive Modeling, Economic Capital Modeling & Catastrophe Modeling

Spotlighting Trends-Predictive Modeling, Economic Capital Modeling & Catastrophe Modeling

As we navigate the effects of the global financial crisis, it’s important for Actuaries to take stock of their analytic capabilities. The application of various modes of modeling is paramount in understanding how the Actuarial profession can continue to contribute and thrive. Actuaries historically have been at the forefront of modeling departments in both the insurance and consulting sectors. The Actuarial skill set now is seen as an integral component across several distinct areas including predictive modeling, catastrophe modeling, and the modeling of economic capital.

Predictive Modeling

  • We are seeing more companies give credence to predictive modeling in pricing and underwriting. We also are seeing new types of data being utilized in analysis.
  • Companies are pushing for predictive analytics and modeling in order to anticipate consumer behavior and to implement preventative wellness plans.

Economic Capital Modeling

  • To have a robust process of enterprise risk management, a company must have solid economic capital modeling capabilities which requires modernization of each company’s solvency and its relation to risk.
  • Any company that operates globally will be affected by Solvency II as it relates to economic capital modeling, and will have to manage its businesses in a consistent manner.
  • There is a growth market for Actuaries interested in positions involving enterprise risk management and economic capital modeling.

Catastrophe Modeling

  • More companies have begun to see the value of catastrophe modeling and realize the consequences of not using this type of modeling.
  • Natural catastrophes come to mind when thinking of this type of risk modeling, but the definition has expanded to include terrorism, workers’ compensation, offshore energy (such as the BP oil spill in the Gulf of Mexico), and accident and health.

As the world is increasingly driven by technology, and deeper data is available to Actuaries, modeling is becoming a more sophisticated art. The recent global financial crisis demonstrated some weaknesses in traditional methods of measuring capital adequacy. The result is a growing understanding that more thorough modeling, specifically in the area of economic capital, is necessary to understand better the potential effects of financial decisions. Catastrophe modeling gives insurers the ability to estimate and prepare for the economic impact of a myriad of disasters. These modeling roles have been viewed as separate functions in the past, but we are seeing more overlap in recent years.

 

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