Ways to Measure Risk
Summarizes some of the key methods that actuaries use to evaluate risk.
There are several standard methods available for the assessment of risk. Methods may include, but are not limited to, scenario tests, sensitivity tests, stochastic modeling, and stress tests.
- Scenario Test – A process for assessing the impact of an event on a plan’s financial condition. This may be one possible event, or several simultaneous or sequentially occurring possible events.
- Sensitivity Test – A process for assessing the impact of a change in an actuarial assumption or method on an actuarial measurement.
- Stochastic Modeling – A process for generating numerous potential outcomes (i.e., thousands) by allowing random variables in one or more inputs over time for the purpose of assessing the distribution of those outcomes.
- Stress Test – A process for assessing the impact of adverse changes in one or relatively few factors affecting a plan’s financial condition.
In determining a method for risk assessment, actuaries use their professional judgment to select methods that best account for the nature, scale, and complexity of the plan while also considering the usefulness, reliability, timeliness, and cost efficiency of the methods.