Actuarial Rate

Actuarialists are experts in calculating risk and loss for insurance purposes. Insurance companies are in business to make a profit, so they hire risk experts to calculate how much the company can expect to lose in the future based upon historical statistics and the risk involved.

For example, homeowner insurance, which covers the value of a home in case of fire, includes historical data used to calculate the actual risk of a specific home burning down. Homes in Malibu, California have a higher historical incidence of fire loss than homes in Austin, Texas. When losses are predicted correctly, and insurance premiums cover the cost of future losses plus extra, the insurance company makes a profit. If estimates of future losses are undercalculated, well, people lose jobs.

At the same time, insurance companies can't overcharge for coverage, or they will lose customers, and won't have to wait for a catastrophic event...since they are creating one of their own.

The actuarial rate is calculated to tell the insurance company the lowest price of insurance to charge customers, while covering possible future losses. Sounds like statistical magic, or just some serious luck.