What is an Actuarial Assumption?

In order for an insurance company to truly calculate the expenses that are associated with providing clients with such benefits as retirement plans or pensions, it is necessary to make an accurate actuarial assumption. Essentially, an actuarial assumption will take into consideration all aspects of the plan, and be able to provide a monetary figure of what it costs the individual or employer to operate the retirement plan, both short term and long term. Here are some examples of factors that must be included in any actuarial assumption in order for the assumption to be accurate.

Age, general health, and life expectancy of the individual are an important factor in making an accurate actuarial assumption. The actuary will look at the current age and health condition of the individual into consideration and calculate the potential number of years until retirement age is reached. This process lays the foundation for the actuarial assumption, and provides the framework in which other aspects will be considered. Obviously, an individual who is just emerging from college, is in good health and starting full time employment will have the potential for many work generating years. On the other hand, an individual who enters a retirement plan in his or her forties and may have some recurring health issues may not be counted upon for as many years of productivity. This one fact is the reason why age, health, and life expectancy are so essential in an actuarial assumption.

The amount of work related compensation currently produced by the individual would also impact the actuarial assumption. Taking into consideration the cost of living in the area, and comparing to the net salary of the individual, it is possible to determine the average amount of disposable income that may be directed into the retirement plan. Actuaries tend to stay up to date on current economic conditions in the area, as those factors will often impact what they are able to charge their clients in the form of monthly premiums into a retirement plan. Based on the amount of available funds for consistent payment into the plan, there may be any number of ways to grow and invest the money, including stocks and securities.

Any accurate actuarial assumption, when employed to the task of managing a retirement plan or pension, will have to take into consideration a number of factors that relate back to the individuals enrolled in the plan. By taking into consideration the ages, health conditions, number of years until retirement, and general economic conditions, it is possible to make an accurate actuarial assumption. However, it is important to keep in mind that the basis for those assumptions can change from time to time. This will require that an evaluation and possible updating of the actuarial assumption will need to take place of a regular basis.