What is '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.

BREAKING DOWN 'Actuarial Assumption'

An actuarial assumption estimates of an unknown value based on the methods of actuarial science. An actuarial assumption is made using statistical tools, such as the correlation of known values to possible outcomes for the unknown value. Typically, the preparation of an actuarial assumption requires complex mathematical and statistical techniques.  

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.

Assumption setting is an essential part of actuarial services across all practice areas – especially as the use of actuarial assumptions continues to rise in the Sarbanes-Oxley era and since the National Association of Insurance Commissioners (NAIC) promulgated the Model Audit Rule. Actuarial measurements are often part of financial statements and are an integral part of an organization's risk management practices.

Common Actuarial Assumptions

One of the most common actuarial assumptions made by insurance companies is the life expectancy projection of a person seeking life insurance. When someone applies for life insurance, an insurance company actuary considers the proposed insured's age, height, weight, gender, tobacco usage and certain data points, relating to health history. The goal of such an actuarial assumption is to establish a life expectancy for underwriting purposes.

In the investing world, actuaries also will make actuarial assumptions about pension plans. Using time value of money, calculations and certain values for investment returns and payout requirements, an actuary will make an assumption is made, so the company underwriting can have an estimate of funding requirements.

RELATED TERMS
  1. Actuarial Gain Or Loss

    Actuarial gain or loss represents adjustments to actuarial assumptions ...
  2. Actuarial Adjustment

    An actuarial adjustment refers to a revision made to reserves, ...
  3. Canadian Institute Of Actuaries ...

    The Canadian Institute of Actuaries, or CIA, is an professional ...
  4. Actuarial Consultant

    An actuarial consultant is a professional who advises clients, ...
  5. Actuarial Science

    Actuarial science is a discipline that assesses financial risks ...
  6. Actuarial Cost Method

    Actuarial cost method is used by actuaries to calculate the amount ...
Related Articles
  1. 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.
  2. Insurance

    For Life Insurers, Making Money Is A Numbers Game

    Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
  3. 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.
  4. Tech

    8 Profitable Majors For The College-Bound In 2016

    Choose your college major wisely to justify the rising cost of higher education. Here are 8 majors that lead to good jobs and high salaries.
  5. Investing

    Target Prices: The Key to Sound Investing

    Learn how to evaluate the legitimacy of target prices and why investors should trust them over ratings.
  6. Investing

    Style Matters In Financial Modeling

    If you're looking to get a job as an analyst, you'll need to know how to work it.
  7. Retirement

    The 3 Best Retirement Calculators For 2016

    Find out the top three online retirement calculators to use in 2016 for determining how much you need to save to provide for sustainable income.
RELATED FAQS
  1. What are the drawbacks of using the Dividend Discount Model (DDM) to value a stock?

    Understand how the dividend discount model works, and learn some of the inherent flaws in the model that make it suspect ... Read Answer >>
  2. What assumptions are made when conducting a t-test?

    Learn what a t-test is and discover the five standard assumptions made regarding the validity of sampling and data used in ... Read Answer >>
Trading Center