## Actuarial Rate Details

An insurance company calculates its actuarial rate to prepare for its future financial obligations. Actuaries, people who calculate actuarial rates, make this calculation by looking at historical data. Because of this, an actuarial rate is rarely completely accurate. However, the rate will act as a guide and help insurance companies prepare for future losses. The insurance company uses the actuarial rate to set premium costs.

An insurance company is in a highly competitive and crowded business and must set the cost of its premiums at a level that allows it to compete with its competitors. At the same time, the actuarial rate must take into account the cost of a future payout, the expenses that the company incurs, a reasonable profit, and individual state regulations which may govern the cost of premiums.

An actuarial rate answers one main question: What is the lowest price the company can charge for a premium and still cover all its obligations? A company will review its actuarial rates regularly and adjust them if necessary, depending on changing circumstances.

## Actuarial Rate Example

An insurer is trying to set a price for premiums for its new term life insurance policy. This policy offers coverage for ten years. According to statista.com, death rates per 100,000 people in the following age groups in the United States (2018) are as follows:

Age Male Female

15-24 100.1 38.8

25-34 176.1 80

35-44 249.5 140.2

45-54 491.8 302.5

55-64 1,119 670

The insurer will study these figures and arrive at some obvious conclusions. Older people are a greater risk to the company than younger people, and men are a greater risk than women. Beyond these conclusions, the company will consider regional differences, lifestyle, occupation, and any other explanation for the likelihood of early death. The table tells us that a man in the 55-64 age bracket was nearly thirty times more likely to die in one year than a woman in the 15-24 age group. The insurance company may decide to tailor its policy to people under 40 and charge lower premiums.

## Significance of an Actuarial Rate

An actuarial rate will estimate how much the company will have to pay out and when. Does the premium adequately cover the company's future obligations? Does the premium cover an adequate percentage of current expenses and provide a profit for the company? An actuarial rate assumes that what was statistically true in the past is a reasonable guide to what will happen in the future. It cannot cover every eventuality but is statistically likely to give an accurate picture.

Insurance companies will offer lower premiums to lower-risk groups. The actuarial rate will allow the company to set a realistic and competitive premium. Suppose an insurance company convinces a considerable number of young people to take out its policy. In that case, this move will force its competitors will to compete for higher and riskier age groups.