A Note on Parameter Risk

By Gary G. Venter, Rajesh V. Sahasrabuddhe

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Consideration of parameter risk is particularly important for actuarial models of uncertainty. That is because—unlike process risk—parameter risk does not diversify when modeling a large volume of independent exposures. Without consideration of parameter risk, decision makers may be tempted to underwrite higher volumes as a result of the apparent high degree of predictability in the mean outcome. However, the financial impact of parameter error is magnified by volume and doing so could have significant consequences for the firm. In this paper, we present an inventory of uncertainty models associated with various approaches that actuaries use in estimating model parameters.

Keywords: parameter risk; risk models


Venter, Gary G., and Rajesh V. Sahasrabuddhe, "A Note on Parameter Risk," Variance 9:1, 2015, pp. 54-63.

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Variance (ISSN 1940-6452) is a peer-reviewed journal published by the Casualty Actuarial Society to disseminate work of interest to casualty actuaries worldwide. The focus of Variance is original practical and theoretical research in casualty actuarial science. Significant survey or similar articles are also considered for publication. Membership in the Casualty Actuarial Society is not a prerequisite for submitting papers to the journal and submissions by non-CAS members is encouraged.