Category: 

What Is an Actuarial Rate?

Article Details
  • Written By: Mary McMahon
  • Edited By: Shereen Skola
  • Last Modified Date: 28 September 2018
  • Copyright Protected:
    2003-2018
    Conjecture Corporation
  • Print this Article

An actuarial rate is a predicted future rate of loss based on analysis. This requires an evaluation of historic losses and various factors that may play a role in future financial events. The estimate is used to make decisions about funding insurance pools, pension plans, and other programs. It is periodically adjusted to reflect incoming information that might have an impact on its accuracy, with the goal of keeping it as close to reality as possible.

People with actuarial training apply statistics and analysis to financial data to determine risk levels. When they compute an actuarial rate, one source of information is historic records; an insurance plan, for example, has records on how much it paid out in the past. The actuary can also evaluate specific populations to learn more about risks, in order to come up with an accurate estimate. Demographic information can be helpful, as it may provide information about the numbers of people who will be aging and making insurance or pension claims.

Using information from this research, it is possible to come up with an actuarial rate to estimate how much will be lost in the future. This information is used in planning. It can influence premiums and contributions to a benefits plan, for example. Insurance companies may need to collect more money to ensure they will be able to provide coverage in the future, or a pension plan might require larger contributions to remain fully funded.

Ad

Accuracy of an actuarial rate can vary. The more information available during the analysis phase, the better the chances of being correct with the estimate. Risk analysis can be complex, and errors or deviations in this process may also contribute to imbalances in the actuarial rate. For example, an actuary could fail to adequately account for the risk that multiple investments might fail, depleting a pension fund faster than expected; this may leave it unable to meet obligations.

Actuarial professionals use information on past predictions to inform future ones. The level of accuracy in the past can be assessed to learn more about specific errors and determine if they can be prevented. Actuaries might change the life expectancy formulas they use, for example, if it becomes clear that the existing calculations are no longer suitable for their needs. They can also consider new sources of data for greater accuracy in their estimates, basing this decision on information that would have been helpful in the past.

Ad

Recommended

Discuss this Article

Post your comments

Post Anonymously

Login

username
password
forgot password?

Register

username
password
confirm
email