Business, Legal & Accounting Glossary
An actuarial assumption is an estimate of an uncertain variable input into a financial model, normally for the purposes of calculating premiums or benefits.
Acuturial Assumptions are estimates of future variables used to calculate the likely costs of pension schemes and life assurance policies, and consequently in order to set the appropriate contributions and benefits.
There are 2 different types of actuarial assumptions relevant to post-employment benefits:
Demographic Assumptions make assumptions about the characteristics of employees; for example – Mortality and/or disability rates.
Financial Assumptions make assumptions around fiscal variables such as the anticipated costs of medical treatment and/or anticipated salaries.
An entity that operates a defined-benefit pension scheme is required by law to disclose the actuarial assumptions it utilised when compiling its obligations under the scheme, which also includes the discount rate used within the calculation.
An actuarial assumption is an estimate of an unknown value made in accordance with methods of actuarial science. An actuarial assumption is made using statistical tools such as the correlation of known values to possible outcomes for the unknown value. Typically, complex mathematical and statistical techniques are used in the preparation of an actuarial assumption.
A common actuarial assumption that is made is life expectancy of a person seeking life insurance. An actuary working for the insurance company will take into account the proposed insured’s age, height, weight, gender, tobacco usage, and certain data points relating to health history to make an actuarial assumption of the most likely life expectancy for underwriting purposes. Actuaries also will make an actuarial assumption in regards to pension plans. Using time value of money calculations and certain values for investment returns and payout requirements an actuarial assumption is made so the plan sponsor can have an estimate of funding requirements.
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This glossary post was last updated: 4th February, 2020 | 288 Views.