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The Need for Theory in Actuarial Economic Models

Published online by Cambridge University Press:  10 June 2011

P.P. Huber  and
R.J. Verrall
P.P. Huber
Affiliation:
Swiss Re Life & Health Limited, Tower 42, Old Broad Street, London EC2N 1HQ, U.K.
R.J. Verrall
Affiliation:
Department of Actuarial Science and Statistics, The City University, Northampton Square, London, EC1V 0HB, U.K.
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Abstract

This paper addresses the fundamental issues in the construction and use of actuarial economic models, with specific reference to those described in the UK literature. Two approaches are considered: an empirical approach and a theoretical approach using financial economics. Although empirical testing is essential, the difficulties associated with it should not be underestimated. A theoretical framework can be used to limit the impact of these difficulties. However, economic modelling is further complicated by the lack of a reliable and comprehensive theoretical framework. This suggests that economic models are always likely to be inaccurate and consequently actuarial judgement is likely to be indispensable.

Keywords

Economic MethodologyFinancial EconomicsJump-Equilibrium ModelWilkie's Model
Type
Sessional meetings: papers and abstracts of discussions
Information
British Actuarial Journal , Volume 5 , Issue 2 , 01 June 1999 , pp. 377 - 395
Copyright
Copyright © Institute and Faculty of Actuaries 1999

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