Actuarial Risk

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. 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.
  2. Managing Wealth

    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.
  3. Personal Finance

    Explaining Insurance

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

    Understanding Your Insurance Contract

    Learn how to read one of the most important documents you own.
  5. Personal Finance

    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.
  6. Personal Finance

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  7. Personal Finance

    The History Of Insurance In America

    Insurance was a latecomer to the American landscape, largely due to the country's unknown risks.
  8. Personal Finance

    Insurance Coverage: A Business Necessity

    Don't go to work without this policy in place - especially if your work is in your home.
  9. Personal Finance

    Bundle Your Insurance For Big Savings

    Bundling your insurance can save you money and time. Read on to see how get the most out of multiline insurance discounts.
  10. Personal Finance

    How Much Life Insurance Should You Carry?

    Learn how much - if any - insurance you really need.
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. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  2. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  3. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  4. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  5. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  6. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
Trading Center