Actuarial Assumption

Definition of 'Actuarial Assumption'


An actuarial assumption is an estimate of an uncertain variable input into a financial model, normally for the purposes of calculating premiums or benefits. For example, a common actuarial assumption relates to predicting a person's lifespan, given their age, gender, health conditions and other factors. Actuaries use large tables of statistical data which correlate the uncertain variable to a variety of key predictive variables. Given the values for the predictive variables a sound actuarial assumption can be made for the uncertain variable.

Investopedia explains 'Actuarial Assumption'


Actuarial assumptions are important because they allow for the equitable transfer of risk in many situations. For instance, when underwriting life insurance policies, it is important to understand the probability that the insured might pass away during the policy period. Given an accurate actuarial assumption for this probability, it is easy to calculate a fair premium for such a policy. Without the ability to accurately figure these probabilities, very few people would be willing to provide insurance. If they were, it would have to be more expensive to allow room for unexpected losses.


Filed Under: ,

comments powered by Disqus
Hot Definitions
  1. Organic Growth

    The growth rate that a company can achieve by increasing output and enhancing sales. This excludes any profits or growth acquired from takeovers, acquisitions or mergers. Takeovers, acquisitions and mergers do not bring about profits generated within the company, and are therefore not considered organic.
  2. Family Limited Partnership - FLP

    A type of partnership designed to centralize family business or investment accounts. FLPs pool together a family's assets into one single family-owned business partnership that family members own shares of. FLPs are frequently used as an estate tax minimization strategy, as shares in the FLP can be transferred between generations, at lower taxation rates than would be applied to the partnership's holdings.
  3. Yield Burning

    The illegal practice of underwriters marking up the prices on bonds for the purpose of reducing the yield on the bond. This practice, referred to as "burning the yield," is done after the bond is placed in escrow for an investor who is awaiting repayment.
  4. Marginal Analysis

    An examination of the additional benefits of an activity compared to the additional costs of that activity. Companies use marginal analysis as a decision-making tool to help them maximize their profits. Individuals unconsciously use marginal analysis to make a host of everyday decisions. Marginal analysis is also widely used in microeconomics when analyzing how a complex system is affected by marginal manipulation of its comprising variables.
  5. Treasury Inflation Protected Securities - TIPS

    A treasury security that is indexed to inflation in order to protect investors from the negative effects of inflation. TIPS are considered an extremely low-risk investment since they are backed by the U.S. government and since their par value rises with inflation, as measured by the Consumer Price Index, while their interest rate remains fixed.
  6. Gilt-Edged Switching

    The selling and repurchasing of certain high-grade stocks or bonds to capture profits. Gilt-edged switching involves gilt-edged security, which can be high-grade stock or bond issued by a financially stable company such as the Blue Chip companies or by certain governments.
Trading Center