Actuarial Equity

What Does Actuarial Equity Mean?

Actuarial equity is the method used by an insurance company to determine a premium. It is calculated based on several factors, including age, health profile, sex, family medical history, and the type of insurance the applicant seeks to purchase.

Insuranceopedia Explains Actuarial Equity

Actuarial science is a field that combines mathematics and statistics to assess the financial risks involved in issuing insurance policies. It is practiced by actuaries, whose role is to ensure the financial stability of insurance companies. The same statistical work is what drives most of the factors that affect car insurance rates, from age and driving record to vehicle type and location.

Consider the hypothetical example of Justin, a 21-year-old male who enjoys drag racing as a hobby and is applying for auto insurance. The actuary reviewing Justin’s application will examine statistics on male drivers and their likelihood of being involved in road accidents, while also taking into account whether Justin’s hobby (drag racing) presents an additional risk. Statistically, young males are more prone to accidents, and drag racing further increases that risk. As a result, based on these factors, Justin may be charged a higher premium than some of his peers, especially if they engage in less risky hobbies. This is also why premiums for 21-year-olds tend to run higher than those for drivers in their 30s or 40s, even before any hobby or driving history gets factored in.