Preface

Summary

This book began life as a sessional paper presented to the Institute of Actuaries in Manchester and, some months later, to the Faculty of Actuaries in Edinburgh. Its presentation occurred at around the same time that a new subject on enterprise risk management was being developed for the UK actuarial exams. This made it a good time to expand the paper into something more substantial, with detailed information on many of the techniques that were only mentioned in the initial work. It also means that the book has benefited greatly from the work done by the syllabus development working party, led by Andrew Cairns and managed by Lindsay Smitherman.

I found myself writing this book during a time of crisis for financial institutions around the world. Financial models have been blamed for a large part of this crisis, and this criticism is, to an extent, well-founded. It is certainly tempting to place far too much reliance on very complex models, ignoring the fact that they merely represent rather than replicate the real world. Some senior executives have also been guilty of seeing the output of these models but not understanding the underlying approaches and their limitations. Finally, many models have been designed seemingly ignorant of the fact that the data histories needed to provide parameters for these models are simply not available. However, at least as big an issue is that many non-financial risks were allowed to thrive in the years before the crisis.