DEFINITION of 'Actuarial Risk'

The risk that the assumptions that actuaries implement into a model to price a specific insurance policy may turn out wrong or somewhat inaccurate.

Possible assumptions include the frequency of losses, severity of losses and the correlation of losses between contracts.

Also known as "insurance risk".

BREAKING DOWN 'Actuarial Risk'

Making sure that the assumptions in a model actually reflect real life is absolutely vital for the pricing of all types of insurance. Flaws in a model's assumptions could lead to premium mispricing. In the worst case scenario, an actuary may underestimate the frequency of an event. The unaccounted incidents will cause an increase in the frequency of payouts, which could bankrupt an insurer.

RELATED TERMS
  1. Actuarial Assumption

    An actuarial assumption is an estimate of an uncertain variable ...
  2. Actuary

    A professional dealing with the assessment and management of ...
  3. Actuarial Service

    Method by which corporations determine, assess and plan for the ...
  4. Average Severity

    The amount of loss associated with an average insurance claim. ...
  5. Actuarial Rate

    Actuarial rate is an estimate of the expected value of future ...
  6. Actuarial Valuation

    An actuarial valuation is a type of appraisal which requires ...
Related Articles
  1. Personal Finance

    Insure Your Future with a Career as an Actuary

    If you've got excellent math skills, they can add up to a lucrative career as an actuary.
  2. Personal Finance

    The Top 5 Skills Every Actuary Needs

    The actuary profession is growing fast. Here's a look at the majors and top skills one needs to become a successful actuary.
  3. Financial Advisor

    Career Advice: Financial Analyst Vs. Actuary

    Read an in-depth comparison between financial analysts and actuaries, what it's like to work as each and how to determine which is best for you.
  4. Personal Finance

    Career Advice: Accounting Vs. Actuary

    Read about what life is like as an actuary or as an accountant, how the two careers are different and how to decide which is best for you.
  5. Insurance

    Explaining Insurance

    Insurance is a form of contract between an individual and an insurance company that spreads risk in exchange for premium payments.
  6. Insurance

    What is Adverse Selection in the Insurance Industry?

    Adverse selection impacts the markets for health insurance and automobile insurance, but interfering with actuarial work has consequences.
  7. Insurance

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  8. Insurance

    Elements of Insurable Risks: A Quick Guide

    Explore the elements of insurable risk: due to chance, measurable and definite, predictability, noncatastrophic, random selection and large loss exposure.
  9. Insurance

    How Big Data Has Changed Insurance

    No longer confined to technology, big data has become integral to providing solutions to the insurance industry's long standing challenges.
  10. Insurance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
RELATED FAQS
  1. What's the average salary of an actuary?

    Get insight into the intriguing career of risk analysis and forecasting. How much do actuaries make, and how is this field ... Read Answer >>
  2. What caused the European / Eurozone debt crisis?

    Understand how insurance companies price insurance premiums, and learn the importance of data and statistics in the insurance ... Read Answer >>
  3. What is the main business model for insurance companies?

    Read about the most important components of an insurance company business model, such as risk pricing, float investing and ... Read Answer >>
  4. How is my insurance premium calculated?

    An insurance premium is the money charged by insurance companies for coverage. Insurance premiums for services differ from ... Read Answer >>
  5. What are the main factors that impact share prices in the insurance sector?

    Learn about some of the main factors that impact share prices in the insurance sector. Insurance companies make money by ... Read Answer >>
  6. What risks do I face when investing in the insurance sector?

    Read about the unique challenges faced by insurers, and learn how those challenges manifest themselves as risks for equity ... Read Answer >>
Hot Definitions
  1. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  2. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  3. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  4. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
  5. 403(b) Plan

    A retirement plan for certain employees of public schools, tax-exempt organizations and certain ministers. Generally, retirement ...
  6. Master Of Business Administration - MBA

    A graduate degree achieved at a university or college that provides theoretical and practical training to help graduates ...
Trading Center