While model building will always be a core element of insurance, being aware of the limitations of models and techniques to manage those limitations is crucial to successful risk management.

This article focuses on the challenge for the risk manager who has been given responsibility for an internal or an ORSA model. It highlights three issues that risk managers need to make allowance for in managing their models, including model scope and historical data, associative dependency, and the problems that arise when elegant models confound transparency and understanding.

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This article was published in the July 2012 issue of theActuarial Post.