Context: actuarial science
The actuarial control cycle is a generic problem solving methodology used in risk management. While initially applied to the management of life insurance companies' products, the methodology can be extended to other insurance companies and financial institutions.
The cycle is as follows (Goford 1985):
- Initial Assumptions. Here the initial assumptions for the product to be modelled are made.
- Profit Test. The result from the profit test will determine whether the product is "profitable", i.e., it provides a positive contribution to the company's fixed costs.
- Model Office. Here a full asset-liability model is run over the entire company to see whether the product is profitable to the company as a whole. A result of this model is the product's and the company's appraisal values (how much they are worth).
- Analysis of Surplus. After a certain time period, the actual experience is compared to the expected experience from the models.
- Monitoring. Decide whether assumptions need to be updated, or whether other actions need to be taken (such as scrapping the product, adjusting reserves)
- Updating of Assumptions that feeds back into 2.
You will notice that the control cycle is basically a feedback loop, that is common everywhere. It is called the actuarial control cycle simply because of its application.