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Thursday, June 28, 2007

Application of actuarial know-how

1. Here is an example of how actuarial know-how can be applied in motor-car insurance

100,000 people insure their cars
20% have an accident each year

Total claims to be paid is estimated to be (say) $60 million (average of $3,000 per claim)
Expenses to run the business $20 million
Total is $80 million

Each person has to pay a premium of $800
The insurance company can charge more, to make a profit margin

2. Different premium rates

Not everyone pays the same premium rate of $800
Some people are more accident prone
Some vehicles are more expensive to repair
The premium rate varies according to the type of risk

3. Time value of money

The claims are paid one, two or more years in the future
The premium can be invested to earn an income
This can be used to reduce the premium rate, or to increase
the profit.

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