The Actuarial Paradigm: a Nontechnical Exposition

A NONTECENICAL EXPOSITION OVERVIEW In his insightful and groundbreaking essay entitled The Structure of Scientific Revolutions, Thomas S. Kuhn discussed the notion of scientific advancement. In particular, he introduces the idea of a paradigm, a body of knowledge and beliefs which provides direction for research. The development and acceptance of a paradigm is a key factor in transforming a group of practitioners into a profession. The beginning of a scientific revolution is tne discovery of an anomaly relative to expectations which the existing paradigm creates. A " crisis " occurs when standard analysis is not producing desired results. A search for an alternative paradigm commences, and its acceptance completes the revolution. Developments in the liability insurance area in recent years have caused casualty actuaries to reevaluate the tools they use in solving problems in their domain. Simultaneously, the range of issues determined to be within the purview of the actuarial profession has expanded rapidly. As a result, the generally agreed upon body of knowledge of casualty actuaries have been undergoing something of a revolution. The intent of this paper is to survey the elements which are impacting on the issues casualty actuaries face today and to discuss the implications of that on our ability to develop and maintain a paradigm which can respond to the challenges. Such a paradigm must help define the profession as well as 49 provide a basis for problem solving. To the extent that the scope of actuarial activity is such that some aspects of that activity are not amenable to the notion of a paradigm, those aspects will be considered as separate from I the primary activity of professional actuaries. As actuaries approach the 100th anniversa6i of their profession in North America, they will pause to reflect on the status of their profession. The challenges faced today provide perspective on the larger issues to be faced in coming years. Socioeconomic changes of the type that have caused the liability insurance area to be revolutionized will continue to provide actuaries with opportunities to creatively resolve some of society's most perplexing problems. To evaluate the current core of actuarial science, it may be helpful to develop a notion of what an actuary is. Conventional wisdom uses phrases like " insurance mathematician, " and " ratemaking and reserving specialist. " A more objective way of defining an actuary's role might be to consider the body of knowledge encompassed …