Long-term stochastic risk models: The 6th generation of modern actuarial models?

by Bill Curry

This paper discusses the use of modelling techniques for the purpose of risk management within life insurers. The key theme of the paper is that life insurance is long-term-business and carries with it long-term risks, yet much of modern actuarial risk management is focused on short-term modelling approaches. These typically include the use of copula simulation models within a one-year Value-at-Risk framework.

The paper discusses the limitations inherent within the techniques currently used in the UK and discusses how the focus of the next generation of actuarial models may be on long-term stochastic projections. The scope of the paper includes a discussion of how existing techniques, together with new approaches, may be used to develop such models and the benefits this can bring.

The paper concludes with a practical example of how a long-term stochastic risk model may be implemented.