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IAI Actuarial Core Principles · Business Management · Skills and knowledge for working as an actuary in financial services

A pension consultant in Chennai is advising a company on funding its gratuity scheme. The Actuarial Control Cycle is applied in a changing economic and regulatory environment. Which statement best explains why professional judgement, and not mechanical application of a model, is central to the cycle?

Judgement is central because the future is uncertain: the problem definition, the assumptions and the interpretation of monitoring results all need reasoned choices that are communicated and reviewed. A model alone cannot remove this uncertainty, and the cycle applies to consultants as well as insurers.

  1. AAssumptions and the problem definition depend on uncertain future events, so judgement is needed to choose, communicate and review themCorrect
  2. BModels remove all uncertainty so judgement is needed only at the end
  3. CThe cycle applies only to insurers, so consultants need no judgement
  4. DRegulation fixes every assumption, leaving no room for judgement
  5. Judgement is needed only when the client is dissatisfied with the result

Explanation

Future experience is uncertain, so every stage, from framing the problem to selecting assumptions and reviewing outcomes, needs judgement. Models do not remove uncertainty, and the cycle applies to consultants and other practice areas too. Regulation seldom fixes all assumptions.

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