The Board for Actuarial Standards has published a consultation paper on modelling, having identified the reliability of data and the appropriateness of actuarial models as key ingredients in the production of high quality actuarial information. It published a consultation paper on data earlier in the year.

The consultation paper includes proposals that will in due course result in a technical actuarial standard on modelling. The standard will support the BAS’s objective that the users of actuarial information can place a high degree of reliance on its relevance, transparency of assumptions, completeness and comprehensibility. As a result of the standard, the BAS hopes that such users will understand both the power and the limitations of the models on which actuarial information is based, and thus be able to assess the value of the information that is provided.

The principles of good modelling on which the standard will be based will address, among other matters, the appropriate testing of models, measurement of risk and uncertainty, selection of assumptions and explanations that should be given. The responses to the consultation – from users as well as actuaries – will be key inputs to the BAS’s thinking as it develops this important standard.

Models are used throughout actuarial work, and play a significant role in ensuring the solvency of insurance companies and determining the levels of contributions to be paid to pension schemes. They are also widely used as part of the risk management process and in the making of strategic decisions. Much of the actuarial information that is used by pension scheme trustees, insurance company directors, and others, is derived from the outputs of models.

Paul Seymour, Chair of the BAS, said:

“Models are powerful tools, but are inevitably simplifications of the real world, with a variety of limitations. Our aim is to make sure users of information derived from models can make informed judgments on the value and reliability of that information. Now is the time for those who rely on such information to contribute to our deliberation in this vital area.”

1. The Financial Reporting Council (FRC) is the UK’s independent regulator responsible for promoting confidence in corporate reporting and governance. Its functions are exercised principally by its operating bodies (the Accounting Standards Board, the Auditing Practices Board, the Board for Actuarial Standards, the Financial Reporting Review Panel, the Professional Oversight Board and the Accountancy and Actuarial Discipline Board) and by the Committee on Corporate Governance.
2. The Board for Actuarial Standards has a primary objective of promoting competence and transparency of actuarial practice by establishing and improving actuarial technical standards and ensuring that they are coherent, consistent and comprehensive.
3. The Board’s consultation paper on data was issued in September 2008 (http://www.frc.org.uk/bas/publications/index.cfm?mode=list&cID=27). The development of generic actuarial standards on modelling and data were key proposals in the Board’s recent consultation on the structure of technical standards (http://www.frc.org.uk/bas/publications/index.cfm?mode=list&cID=27). The Financial Reporting Council’s recent discussion paper Promoting actuarial quality also highlighted the importance of models in actuarial methods (http://www.frc.org.uk/images/uploaded/documents/Promoting actuarial quality May 2008 FINAL3.pdf ).
4. The BAS is also publishing a non-technical background article. It is freely available for use in whole or in part and can be downloaded from the BAS’s website at: http://www.frc.org.uk/bas/publications/index.cfm?mode=list&cID=27.
5. All media enquiries should be addressed to Louise Pryor, Director, Actuarial Standards, 020 7492 2328 or email at l.pryor@frc.org.uk.