Modelling: The elephant in the room

In an insurance world preoccupied with Solvency II, internal models have increased in both complexity and business significance. Nonetheless, actuaries are painfully aware of models’ limitations in representing the economic world, not least because of their reliance on often arbitrary assumptions. It is commonplace to say “all models are wrong but some are useful”. But in what sense might an internal model be wrong? If a model is wrong, how can it be useful? Significantly, what incentives does regulation produce for model development and use