Actuarial Adjustment Details

Actuaries use sophisticated mathematical and statistical tools to calculate future liabilities in, for example, the insurance industry or in pension provision. An insurer faces two types of future liability—potential and actual. Potential liability is one that the company may or may not have to pay, like auto insurance. An actual liability is one that the insurer will have to pay in most cases, a pension, for example. In both cases, actuaries present trends into the future to try to calculate liabilities that the insurer will have to meet.

An actuary cannot guarantee that her predictions will be completely accurate. No one can know how conditions will change in the future. The actuary can only talk about probabilities and try to make her prediction as accurate as possible by ensuring that the original data she uses is as complete as possible and that her assumptions are sound. The actuary will closely monitor changes in present conditions that will affect future liabilities and, if she sees variances between present provisions and future liabilities, will make an actuarial adjustment.

These adjustments can take various forms. An insurance company might notice a tendency to increase storm severity, insurance claims covering property damage are becoming more numerous, and claim higher insurance payouts. The company may decide to make an actuarial adjustment by increasing the cost of its premiums. An auto insurer might see that drivers of partially automated cars are involved in fewer accidents. It might reward these drivers and encourage others to change to these vehicles by reducing their premiums.

Real World Example of Actuarial Adjustment

In August 2011, the American Academy of Actuaries published an article titled "Automatic Adjustments to Maintain Social Security's Long-Range Actuarial Balance." The article discusses how the government can provide sufficient funds to meet its future pension obligations. The government will, says the article, need to make actuarial adjustments. It is worth quoting the key points:

  • "The Social Security trustees have been reporting for many years that the system is not in long-range actuarial balance.
  • Many proposals have been made to restore long-range actuarial balance, although no legislative consensus has been reached.
  • When legislation to achieve actuarial balance is adopted, Congress could include automatic adjustment mechanisms designed to prevent the system from again falling out of actuarial balance, thereby reducing the chance that future corrective legislation will be required.
  • Under an automatic adjustment approach, small changes would be made automatically on a regular schedule if needed to maintain actuarial balance.
  • Automatic adjustment mechanisms that contribute to maintaining long-range solvency are used by many industrialized nations in their national pension schemes."

Funding national pension plans is a problem that many countries face. People live longer, the birthrate is falling, and many nations are noticing an imbalance between current contributions and future obligations. It is necessary to make actuarial adjustments. However, these adjustments are not very popular with the voting public because they imply that people will have to pay more tax, retire later or accept a lower pension. Actuarial adjustments have practical consequences.