Prophet Modeling (1): Some Thoughts on Setting Up Takaful Library

I had an hour chat with Ms. H & Mr. L on Prophet Modeling yesterday. Ms. H is my ex-staff when I was the leader for the Modeling Team, she is quite brilliant in helping me setting up the Prophet models (simplified) the Valuation Team currently uses; while Mr. L is my replacement. The objective of the short chat was to exchange some thoughts on how to proceed the work to model a comprehensive cash flow projection model for the Takaful business.

Well, although I have partly did the projection model before I resigned from Actuarial Department, I suggested to Mr. L that he should start setting up the model from scratch – instead of continuing from my partially complete model or doing amendments from the Conventional Library. Well, doesn’t this consume more time? This sounds correct if we only have a quick thought, but if we really make a thorough consideration, actually setting up the model from scratch is easier and more efficient.

Let’s talk about doing amendment from Conventional Library first. When I was with my previous employer, the Prophet model I used in my valuation work was modified from the standard Conventional Library. I told Mr. L (who also previously worked in a conventional insurer) that it was alright for the models we used previously to use the standard Conventional Library as a base, because how the conventional insurance business works is close to what the standard Conventional Library has modeled. Mmm… The takaful business doesn’t work the same way as the conventional insurance business (not only different naming for the terms to be used) – modifying the standard library may take more time and may even tends to have more errors – furthermore, there are variables in the standard library that we may not have any idea what they are. Hence, it is better to create the Takaful model from scratch.

How about modifying from my partially complete model? In my view, Mr. L may have his own modeling philosophy and it may not be right to force him to follow my modeling philosophy – unless I have completed the model. Furthermore, he will have better control on the Prophet model he is going to setup – most importantly, he will have better understanding on what he is doing. I remember that one of the appointed actuaries I have worked with commented that there was a tendency that actuarial models worked like a “black box”, which the actuarial people who used the model didn’t understand how the model really worked. Consequently, many mistakes happened here and there in the actuarial analysis – and the errors were EXPENSIVE.

Mr. L also told me that he has some other tasks on his plate, apart from setting up the Takaful model. “Mmm, this is no good.” I commented honestly. Setting up model requires full focus, especially if he has a limited time to complete the model. I even told him that he should even lock himself up in a separate room which doesn’t have interruption.

“Otherwise, you will be in the same boat…”

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