PREFACE
The preface to the first edition of this text explained our mission as follows:
This textbook is organized around the principle that much of actuarial science consists
of the construction and analysis of mathematical models that describe the process by
which funds flow into and out of an insurance system. An analysis of the entire system is
beyond the scope of a single text, so we have concentrated our efforts on the loss
process, that is, the outflow of cash due to the payment of benefits.
We have not assumed that the reader has any substantial knowledge of insurance
systems. Insurance terms are defined when they are first used. In fact, most of the
material could be disassociated from the insurance process altogether, and this book
could be just another applied statistics text. What we have done is kept the examples
focused on insurance, presented the material in the language and context of insurance,
and tried to avoid getting into statistical methods that would have little use in actuarial
practice.
We will not repeat the evolution of the text over the first three editions but will intead
focus on the key changes in this edition. They are:
1. The curriculum committees of the Casualty Actuarial Society and the Society of
Actuaries have made changes over time with regard to coverage on Exam 4/C. As a
result, candidates preparing for this exam using previous editions might skip sections
they knew were not required reading for the exam. This makes for an awkward
presentation and lack of continuity. In this edition we have removed much of the
material that is not tested. We retained a few sections that we believe are needed for
comprehensive coverage (and that we have often taught in our classes). We do not
indicate those sections as it is possible that the sections included in the required
readings will change over time. We are in the process of producing a second text that
will include the material removed from this edition along with new material.
2. Some of the longer chapters have been split into smaller pieces. This is mostly a
cosmetic change.
3. The material on large data sets has been expanded to include more practical
elements of constructing decrement tables.
4. A section has been added to the simulation chapter. It provides methods for
simulating from several special situations.
5. It has been made clearer that Bayesian methods can be easily applied to data that
have been truncated or censored.
6. While the section on extreme value distributions has been removed, there is a brief
section that reminds readers that two of the distributions used in this book are of this
type.
7. Examples have been added and other clarifications provided where needed.
As in all editions, files containing the data sets used in the examples and exercises
continue to be available at the Wiley ftp site:
ftp://ftp.wiley.com/public/sci_tech_med/loss_models/.
As in the third edition, we assume that users will often be doing calculations using a
spreadsheet program such as Microsoft Excel®.1 At various places in the text we indicate
how Excel® commands may help. This is not an endorsement by the authors but, rather,
a recognition of the pervasiveness of this tool.
As in the first three editions, many of the exercises are taken from examinations of the
Casualty Actuarial Society and the Society of Actuaries. They have been reworded to fit
the terminology and notation of this book and the five answer choices from the original
questions are not provided. Such exercises are indicated with an asterisk (*). Of course,
these questions may not be representative of those asked on examinations given in the
future.
Although many of the exercises either are directly from past professonal examinations
or are similar to such questions, there are many other exercises meant to provide
additional insight into the given subject matter. Consequently, it is recommended that
readers interested in particular topics consult the exercises in the relevant sections in order
to obtain a deeper understanding of the material.
Many people have helped us through the production of four editions of this text—
family, friends, colleagues, students, readers, and the staff at John Wiley & Sons. Their
contributions are greatly appreciated.
S. A. KLUGMAN, H. H. PANJER, AND G. E. WILLMOT
Schaumburg, Illinois and Waterloo, Ontario