“Actuarial Risk’ is the risk that the assumptions that actuaries implement into a model to price a specific insurance policy may turn out wrong or somewhat inaccurate. Possible assumptions include the frequency of losses, severity of losses and the correlation of losses between contracts.
Actuarial risk can be simplified as the risk that the assumptions implemented /estimated by an actuary into a particular model for pricing of an insurance policy could be inaccurate or somewhat not necessarily right.
The probable assumptions could be the occurrence of losses, severity of possible losses and the correlation -relationship of losses between contracts. it is also termed as “insurance risk”.
An actuarial should make sure to give right assumptions through his knowledge & expertise as making right assumption for a model showing real-life scenario, forms the basis for pricing for all insurance businesses
Making incorrect assumptions could result in premium mispricing. The worst form of misassumption could be the underestimation of frequency by an actuary.