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A am currently reading a manual on how to use some actuarial modelling software to project the expected liability payments made under an annuity contract. In this guide, the following statement is made:

In financial modelling we start at the point when everyone has died. This is the oldest age in our mortality table.

Could anyone explain to me why it would be preferable to model these cashflows backwards in time, rather than forwards?

Addendum: Having written out this question, I think I might have realised the answer for my self (but please do correct/verify my assertion).

The purpose of actuarial models is often to calculate the reserve that should be held at each projection time. Thus, at a given projection time, say $t$, we need to know the present value of all future expected cashflows (i.e. the present value of all cashflows at times $>=t$). This would give rise to a greater computational overhead if we first calculated the EPV of all payments, and then aggregated to calculate the reserve

Thus, we instead work backwards to from the maximum projection term, when the reserve held is assumed to be zero, back to time 0.

I suppose that the manual should instead have said: "When modelling reserves we start at the point when everyone has died".

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  • $\begingroup$ I find your Addendum logical and a reasonable explanation of why things are done this way. $\endgroup$
    – noob2
    Jun 2 '20 at 10:06

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