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Reason for analysing surplus (Variance)

0 votes
asked Aug 31 in BUS 4027W - Actuarial Risk Management by Rohin

One of the reasons for analysing surplus is given as:

 Demonstrate that the variance in the financial effect of the individual levers is a complete description of the variance in the total financial effect.

I have no idea what they are trying to mean here.

1 Answer

+1 vote
answered Sep 3 by Rowan (4,010 points)

Hi Rohin

This reason works along the same lines of thought as a regression model in stats, where we see how much of the total model variance can be explained by the variables we have chosen to include. For analysis of surplus (aos) we want to know what has given rise to our surplus/deficit. So we identify different levers (like the explanatory vars in a regression model) and we see what their individual financial effects were. We then check that the sum of these individual effects add up to the total surplus/deficit found. If it does, then we know that we have identified all of the levers we need for a proper aos, if it does not, then we know that we still need to identify more levers.