Sample interview questions: How do you adjust actuarial models to account for economic fluctuations or changes in market conditions?
Sample answer:
Adjusting Actuarial Models for Economic Fluctuations and Market Conditions
Actuarial models rely on historical data and assumptions to predict future events. However, economic fluctuations and changes in market conditions can significantly impact the accuracy of these models. To mitigate this, actuaries employ various techniques to adjust their models accordingly:
- Scenario Analysis: Actuaries create multiple scenarios based on different economic conditions and market assumptions. This helps them assess the sensitivity of the model’s outcomes to these factors.
- Stress Testing: Models are subjected to extreme or “worst-case” scenarios to test their robustness and identify potential vulnerabilities. This provides insights into how the model would perform in adverse economic conditions.
- Economic Forecasting: Actuaries incorporate economic forecasts into their models to account for expected changes in inflation, interest rates, and other economic variables. This helps adjust the model’s assumptions to reflect the anticipated economic environment.
- Model Calibration: Historical data is recalibrated to account for recent economic trends or events. This ensures that the … Read full answer