Actuarial Risk Details

The term actuarial risk is an insurance term that helps determine the possibility of a harmful event occurring. It evaluates the rate that the risk is out of proportion to the event's probability. The consequence of not looking into the actuarial risk of a product is that an insurance company could suffer significant loss if this happens. Insurance agencies employ actuaries to evaluate and determine the actuarial risk of a particular insurance product. Their job is to define and set up insurance premiums at a rate that keeps enough money so that insurers can pay off any claims while still making a substantial profit.

Example Of Actuarial Risk

Insurance companies can go bankrupt if they play down actuarial risk. For example, let's say that several people in an area purchase insurance to protect their properties against a natural disaster, such as a tsunami. If they don't calculate the risk correctly, the annual rates they collect will not cover the value of the losses incurred in a major disaster.

On the other hand, insurers might set the premium levels relatively low in favor of company growth if the likelihood of a tsunami happening in the area is low. But if a tsunami happens to hit this low-risk area, the insurer would have to settle the claims for each of these incidents. Actuaries are persons trained to use several factors to determine the level of risk to people or things they're insuring. They will also set the appropriate premium levels based on the assessments. As a result, insurance companies can charge enough money through premiums to pay for potential damages and profits.

Types of Actuarial Risks

Life insurance risk is for insurance companies that offer life insurance products. Insurance actuaries help their companies evaluate and price the policy to make sure it's profitable. One of the most common types of actuaries, they typically use an area's prevailing average mortality rate to determine the likelihood of the number of people who will die in a given year.

Health insurance risk focuses on determining an appropriate premium for healthcare coverage. Health insurance actuaries are often involved in creating corporate insurance plans for employers or a group of people. The policy might cover areas like disability, health, dental, general medication, etc. Actuaries usually use the health history of individuals to determine the risk and appropriate premium for a policyholder.

Property and casualty actuarial risk helps evaluate and develop insurance policies against property loss or disability resulting from a dangerous event. Also known as general actuaries, property and casualty actuaries create insurance policies against property damage from floods, fires, or extreme weather conditions. They use the policyholder's demographics to determine their premium.

History of Actuarial Risk

Actuarial risk stems from actuarial science, which became a formal discipline towards the end of the 17th century. This shift came as a necessity due to an increased demand for long-term insurance coverage like life insurance. These long-term policies usually require money to be set aside to pay for benefits many years into the future. The need to have both money set aside and profit from an insurance policy was what led to the development of an actuarial concept known as the “present value of a future sum.”

You can apply actuarial science to property, casualty, liability, and general insurance. Companies usually provide these forms of insurance coverage over a renewable period, e.g. one year, 6 months, or 3 months. The contract can be terminated either by the insurer or insurance company at the end of the period. actuarial science and has provided insurance companies a means to assess the overall risk of a catastrophic event against its capacity.