Actuary urges new approach to financial modelling

In a workshop titled Financial Modelling Needs to Change in Light of the Credit Crunch, Institute of Actuaries Fellow Martyn Dorey, from CAMRADATA Analytical Services, said financial models should be based on an ‘economic clock’ rather than the calendar clock.

He said: “The Value at Risk [VAR] measure of risk has broken because risk managers took comfort from using historical data to calibrate models that determine what might go wrong in the marketplace.”

“The problem is that these models are usually based on what might happen in a week or a year, but in reality, economics do not generally obey the calendar time unit. Sometimes economic time can go backwards, fast forward or skip a beat, and financial models need to reflect that. Actuaries need to strive to better understand where we are in ‘economic time’.”

Mr Dorey also told delegates at the conference that rather than relying on historical correlation as a way to model linkages, actuaries need to consider more innovative ways to model future dependency structures between assets and liabilities. He suggests that one way to do this is to treat dependency not as a single number but as a pair of ‘imaginary correlations’ coming together.

He said: “It is much more effective to model two assets by thinking about correlation as a paired number system. This sort of approach allows experienced risk managers to develop a defensive, forward-looking view on how dependencies might pan out.”

The conference is at Queens Hotel in Leeds on 3, 4 and 5 May.

                                                                               -- ENDS --

Enquiries: Tel. Fleur Morrison on 020 7632 1453 or email fleur.morrison@actuaries.org.uk

Notes to Editors

1. Actuaries provide commercial, financial and prudential advice on the management of a business's assets and liabilities, especially where long term management and planning are critical to the success of any business venture. They also advise individuals, and advise on social and public interest issues.
2. Members of the Profession have a statutory role in the supervision of pension funds and life insurance companies. They also have a statutory role to provide actuarial opinions for managing agents at Lloyds.
3. The Profession is governed jointly by the Faculty of Actuaries in Edinburgh and the Institute of Actuaries in London. A rigorous examination system is supported by a programme of continuing professional development and a professional code of conduct supports high standards reflecting the significant role of the Profession in society.
4. The Profession is available to provide expert comment to the media on a range of actuarial-related issues, including enterprise risk management, finance and investment, general insurance, health and care, life assurance, mortality, and pensions.