This year’s financial crisis was described by Alan Greenspan as a once-in-a-century event. Similarly, the floods in the Midwest of this past summer were described as 500-year floods. Both characterizations, and both events, serve to remind us of the difficulty in predicting such calamities and in gauging their ultimate scope and effects. Just think: How many once-in-a-century events have occurred this decade?
For the most part, actuaries accept as necessary a key assumption underlying the majority of their work—that historical patterns have predictive value for the future. Yet, paradoxically, it’s also understood that assumptions are not precise, that models sometimes fail, and that the only certainty attached to any point estimate is that, once experience is factored in, the actual number is sure to be different.
Keywords: Enterprise Risk Management
