Stochastic modeling—Theory and reality from an actuarial perspective

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Until recently, most models used in financial analysis of insurance were deterministic—they were static and largely ignored random fluctuations that were likely to occur. Huge advancements in computing power have made it possible for actuaries and financial planners to use stochastic models to better understand complex risk. Stochastic modeling offers a dynamic alternative that can better inform insurers on pricing, financial planning and capital assessment strategies.

This book, sponsored by the International Actuarial Association (IAA) in collaboration with Milliman, is intended for readers in the life and non-life sectors with a background in statistics and/or actuarial science. The book explores general methodologies, current applications, and recommended procedures for the evaluation of results. It uses case studies to illustration applications of stochastic modeling, including how it can be used for pricing, economic capital analysis, and embedded value analysis.