The Need for Theory in Actuarial Economic Models

Abstract

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.