Actuarial Equity Details

In insurance, the contract made between the insured and insurer has a specific premium. This premium is, in simple terms, the price. It is the amount that the client pays periodically, mostly monthly, to the insurance company. The premium in insurance will almost always vary from client to client since insurance contracts have to do with when the insured will pass away. People don't all die at the same age, so what insurance companies do is measure the actuarial age of their clients. With that information, they conclude actuarial equity.

Many factors go into measuring this equity: age, sex, family medical history, current health (like terminal diseases, smoking, drinking, dangerous hobbies, etc.). With this information and considering the type of insurance the client is purchasing, the company decides on the premium. Those who will most likely die sooner than later will have to pay more in premium for the sake of completing the payment during their lifetime. For example, since a young man has a longer time to live (statistically speaking, of course—accidents can happen), they'll pay less in premiums per month.

This does not mean the insurance is cheaper or more expensive for certain groups of people. The actuarial equity simply concludes that one has to be paid sooner or later than the other. Actuarial science is a field heavily involved with statistical mathematics and is used most commonly by companies and insurances to measure financial risk. As they analyze specific cases and people, they conclude that some have, statistically speaking, more or less chance of being alive longer, so that affects their premiums.

Actuarial Equity Example

Let's say a 28-year-old man named Jason and a 46-year-old woman named Janet are both applying for the same auto insurance. At first glance, it's safe to say that Jason, since he is much younger, has more years to live than Janet. But upon actuarial evaluation, there are many things revealed about their lifestyles that ultimately affect the price of their premiums.

It turns out that Jason is a smoker and has a family history that is prone to diabetes. Not only that but one of his hobbies is motocross biking. The actuarial analysis combines these variables and concludes how prone Jason is to accidents during motocross, the chances of him getting diabetes, and the chances of him getting a disease related to smoking.

On the other hand, Janet is relatively healthy. During her check-ups, she showed healthy blood pressure levels, she doesn't drink or smoke, exercises regularly, and her hobbies don't include riding high-speed vehicles. Her actuarial analysis concludes that she is to live a long healthy life, not to mention that statistically, women live longer than men.

The insurance companies give both Janet and Jason somewhat similar premiums. Since Jason is almost 20 years younger than Janet, his is a tad bit lower. But since he is at high risk of accidents and possible future medical conditions, his premium is much higher than that of a healthy 28-year-old.