The Role of Models in Management Decision-Making

Abstract

Managing is deciding. Today no decision is made in the insurance world without using models. Decision-makers are facing many challenges in this situation: models might evolve from entity-specific to standardized under the pressure of regulators and the lack of diversity of providers, being less relevant and trigerring unintended sheep-like behaviours. Models are good at simulating the future from the past but they fail to simulate the unexpected non-linear phenomenon. Often more than one model is used but their consistency is not guaranteed. Understanding the model is a key issue for decision-makers. Models say what a pure rational based decision should be ignoring strategy and politics, discarding the true beliefs of the person making the decision. Models could not duplicate the decision-making process; however they could be the Fifth Solvency II key function.