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.