A Model of Stochastic-Dynamic Prognosis

The conventional applications of the theory of risk concern many important sides of the insurance business, e.g. evaluating the stability, estimating a suitable level for maximum net retention, safety loading or the funds. Whether or not the applications have been useful for practical management may have depend very much on how the risk theoretical treatments have been linked with the complexity of various other aspects involved with the actual decision making. Quite obviously the difficulties in this respect have been considerable, probably sometimes quite overwhelming, according to opinions sometimes expressed that the risk theory is lacking in any practical value. Our purpose is to attack just this problem and to endeavour to build up a picture of the management process of the insurance business in its entirety (as far as possible) and to place the risk theoretical aspects in it as a part among numerous other parts, most of which are not of an actuarial character. In this way some of the classical applications of risk theory are amalgamated with the ideas of modern business planning, especially with the technics of long-range prognoses on the basis of different, often alternative preassumptions or, as it is often called, different business strategies. The main ideas are outlined in the study book of risk theory by Beard-Pentikainen-Pesonen (1969), chapter 13.