What is an actuarial rate?
An actuarial rate is an estimate of the expected value of future losses for an insurance company. The estimate is generally predicted based on historical data and consideration of the risk involved. Accurate actuarial rates help protect insurance companies against the risk of serious underwriting losses that could lead to insolvency.
- Actuarial rates are estimates of future losses, generally based on historical losses.
- The actuarial rate determination is used to determine the lowest premium that meets all the required objectives of an insurance company.
- Rates are expressed as the price per unit of insurance for each unit of exposure.
- Actuarial rates are periodically reviewed and adjusted.
How Actuarial Rates Work
Actuarial rates are expressed as a price per unit of insurance for each unit of exposure, which is a unit of liability or property with similar characteristics. For example, in the property and casualty insurance markets, the unit of exposure is typically equal to $ 100 of the property’s value, and the liability is measured in $ 1,000 units. Life insurance also has $ 1,000 exposure units. The insurance premium is the rate multiplied by the number of protection units that are purchased.
Generally, during a rate review, it is first determined whether actuarial rates need to be adjusted. A projected loss experience gives insurance companies the ability to determine the minimum premium required to cover expected losses.
Requirements for actuarial rates
The main purpose of determining actuarial rates is to determine the lowest premium that meets all the required objectives of an insurance company. A successful actuarial rate must cover losses and expenses, in addition to making a profit. But insurance companies must also offer competitive premiums for a given coverage. Additionally, states have laws that regulate what insurance companies can charge, and therefore business and regulatory pressures are taken into account during the rate setting process.
An important component of the rate setting process is to consider all factors that could affect future losses and establish a premium pricing structure that offers lower premiums to low-risk groups and higher premiums to high-risk groups. By offering lower premiums to low-risk groups, an insurance company can attract those people to buy its insurance policies, reducing its own losses and expenses, while increasing the losses and expenses of insurance companies. competitors (who must then compete for business from higher insurance companies). risk groups of individuals). Insurance companies spend money on actuarial studies to make sure they are considering all the factors that can reliably predict future losses.
Actuaries focus on performing statistical analysis of past losses, based on specific variables of the insured. The variables that produce the best forecasts are used to set the premiums. However, in some cases, historical analysis does not provide sufficient statistical justification for setting a rate, as in the case of earthquake insurance. In such cases, catastrophe modeling is sometimes used, but with less success.