This paper addresses the fundamental issues in the construction and use of actuarial economic models, with specific reference to those described in the UK literature. Two approaches are considered: an empirical approach and a theoretical approach using financial economics. Although empirical testing is essential, the difficulties associated with it should not be underestimated. A theoretical framework can be used to limit the impact of these difficulties. However, economic modelling is further complicated by the lack of a reliable and comprehensive theoretical framework. This suggests that economic models are always likely to be inaccurate and consequently actuarial judgement is likely to be indispensable.
