<p>Actuaries evaluate uncertainty across many actuarial risk categories to help insurers and pension plans set prices and reserves accurately. In practice, actuarial risk management involves identifying and quantifying each risk type &ndash; from mortality and longevity to investment and regulatory risks &ndash; so that models and capital plans remain sound.&nbsp;</p>
<p>This guide explains the 10 major types of actuarial risks, from mortality and longevity to legal/regulatory risk, and shows why understanding these types of actuarial risks is crucial for effective risk management and financial planning.</p>
<h2><strong>What is mortality risk in actuarial science?</strong></h2>
<p><strong>Mortality risk</strong> refers to unexpected changes in the number or timing of deaths among insured lives. In other words, if insured individuals die sooner or more often than expected, the insurer pays out more benefits than anticipated. Actuarial literature defines mortality risk as &ldquo;adverse variance in life insurance deaths (i.e., insureds dying sooner than expected)&rdquo;.</p>
<p>For life insurers, a spike in mortality (for example, due to a pandemic) is a classic mortality risk. Actuaries must allow for mortality risk when setting premiums and reserves so that unexpected increases in death claims do not threaten solvency.</p>
<h2><strong>What is longevity risk?</strong></h2>
<p><strong>Longevity risk</strong> is essentially the opposite of mortality risk: it&rsquo;s the risk that people live longer than assumed. In pensions and annuities, longer lifespans mean more benefit payments over time.&nbsp;</p>
<p>As the Institute and Faculty of Actuaries explains, longevity risk is the risk that &ldquo;longevity increases more than assumed&rdquo; &ndash; meaning life expectancy (mortality improvement) turns out to be better than expected. This improves outcomes for individuals (they live longer lives), but is financially adverse for insurers and pension funds because they must make more payments than projected. Actuaries managing longevity risk will use trend assumptions and longevity tables to adjust pricing and reserves for the possibility that people live decades longer than average.</p>
<h2><strong>What is morbidity risk?</strong></h2>
<p><strong>Morbidity risk</strong> is the risk of higher-than-expected health-related claims. This includes sickness, disability, or critical illness claims that affect life and health insurance plans. According to regulators, morbidity risk covers variability in payouts from policyholder disability or health claims.&nbsp;</p>
<p>In practice, this means if more people get sick or disabled &ndash; or recover slower &ndash; than actuaries assumed, actual claim costs exceed estimates.&nbsp;</p>
<p>For example, an insurer might budget for a certain number of disability claims per year; if the incidence of illness rises, the liability cash flows increase unexpectedly. Actuaries quantify morbidity risk when pricing health and disability insurance and in setting reserves for future health claims, ensuring the business can absorb spikes in medical or disability claims.</p>
<h2><strong>What are lapse and persistency risks?</strong></h2>
<p><strong>Lapse risk</strong> (sometimes considered together with persistency risk) is about policyholder behavior. Lapse risk occurs if more policies lapse (are cancelled or surrendered) than expected; persistency risk is the converse (policies remain active longer).&nbsp;</p>
<p>Under Solvency II guidelines, lapse risk is defined as surrender or discontinuance rates deviating from assumptions. In plain terms, if many policyholders drop or reduce their coverage suddenly, an insurer loses the expected premiums and must adjust its liabilities and profits.&nbsp;</p>
<p>Conversely, unexpectedly high persistency (fewer lapses) may also hurt profits if additional liabilities remain on the books longer than planned. Actuaries monitor lapse/persistency risk by modeling policyholder behavior and using reinsurance or product design to mitigate the impact of unusual lapse patterns.</p>
<h2><strong>What is expense risk?</strong></h2>
<p><strong>Expense risk</strong> relates to the costs of running an insurance business. It is the risk that actual operating expenses(administrative, acquisition, or overhead costs) exceed what was assumed in pricing and reserving. OSFI defines expense risk as &ldquo;the risk associated with the unfavourable variability of expenses incurred in servicing insurance contracts&rdquo;.&nbsp;</p>
<p>In other words, if an insurer&rsquo;s staff costs, claims-processing fees, or other expenses rise unexpectedly, profit margins shrink. Actuaries account for expense risk by setting expense assumptions with a margin for error. They also regularly compare actual expense experience to assumptions &ndash; if costs grow faster than expected, pricing or reserves must be adjusted to remain profitable.</p>
<h2><strong>How does investment risk affect actuaries?</strong></h2>
<p><strong>Investment risk</strong> concerns the performance of the assets that back insurance liabilities.&nbsp;</p>
<p>For example, if interest rates fall or markets crash, an insurer&rsquo;s portfolio value drops. Investment risk is defined as the possibility of &ldquo;an adverse movement in the value of an insurer&rsquo;s on-balance sheet assets or certain off-balance sheet obligations&rdquo;. Actuaries manage investment risk by considering market risk (equity, interest rate, currency) and credit risk in the investment portfolio. A mismatch between assets and liabilities (for instance, long-dated pension liabilities vs. short-term bonds) can exacerbate this risk.&nbsp;</p>
<p>In practice, actuaries project how different investment scenarios affect the balance sheet and ensure that enough capital is held so that adverse market movements do not threaten solvency.</p>
<h2><strong>What is inflation risk?</strong></h2>
<p><strong>Inflation risk</strong> is the risk that rising price levels erode the purchasing power of money, increasing future claim costs or expenses. In insurance, this typically shows up as claims inflation &ndash; for example, medical and repair costs growing faster than expected. Analysts note that long-term claims reserves (especially in non-life insurance) are &ldquo;generally the most exposed to inflation risk,&rdquo; and that claims inflation can cause under-reserving if costs rise above assumptions.&nbsp;</p>
<p>For actuaries, inflation risk means that assumptions about future costs (medical costs, construction costs, etc.) must be stress-tested. If inflation runs high, insurers may need to hold additional reserves or adjust premiums to ensure they can cover the higher-than-expected claim payouts.</p>
<h2><strong>What is catastrophic risk?</strong></h2>
<p><strong>Catastrophic risk</strong> (often called catastrophe risk) covers extremely large losses from rare events. This includes natural disasters (earthquakes, hurricanes), large accidents, or pandemics. For life insurers, it can mean many policyholders dying suddenly (e.g. a pandemic); for property insurers, a major storm causes massive claims. One expert summary defines catastrophe risk as &ldquo;the risk of many policyholders dying or falling sick due to a sudden event, such as a pandemic&rdquo;. Catastrophe shocks are immediate and severe, unlike gradual mortality changes. Actuaries model catastrophe risk by using extreme-event scenarios and catastrophe bonds or reinsurance. Pricing includes extra margins to protect against these tail events, and reserves/capital stress tests ensure that an insurer could survive a major catastrophe loss.</p>
<h2><strong>What is model risk?</strong></h2>
<p><strong>Model risk</strong> arises from the actuarial models themselves. It is the risk that a model is flawed or mis-specified, leading to incorrect results. In finance, model risk is defined as loss from &ldquo;using insufficiently accurate models to make decisions&rdquo;. For actuaries, this could mean using the wrong mortality table, underestimating volatility, or coding errors in a reserving model. If key assumptions or algorithms are wrong, the pricing, reserves, or capital will be miscalculated. Managing model risk involves model validation, back-testing, and governance: actuaries regularly check models against actual experience and expert judgment to ensure that decisions based on models remain reliable.</p>
<h2><strong>What are regulatory and legal risks?</strong></h2>
<p><strong>Regulatory risk and legal risk</strong> involve changes in the law or litigation that affect the insurer. Regulatory risk is the chance that new laws or regulations (for example, changes in solvency requirements or tax rules) will materially impact the insurer&rsquo;s business.&nbsp;</p>
<p>For instance, stricter capital requirements might force an insurer to raise prices or hold more capital. Legal risk is the threat of losses from lawsuits, fines or breaches of contract. By one definition, legal risk includes &ldquo;losses, penalties or reputational damage due to breaches of laws or regulatory obligations&rdquo; or changes in laws.&nbsp;</p>
<p>In practice, actuaries must stay aware of evolving insurance regulations, as well as legal exposures (e.g. class-action lawsuits, compliance penalties) that could cause unexpected costs. Effective actuarial risk management therefore includes monitoring legal/regulatory developments and modeling their impact on future liabilities.</p>
<h2><strong>Conclusion</strong></h2>
<p>In summary, actuaries must account for a broad range of types of actuarial risks in their work. Each risk &ndash; mortality, longevity, morbidity, lapse/persistency, expense, investment, inflation, catastrophe, model, and regulatory/legal &ndash; has distinct causes and effects on an insurer&rsquo;s finances.&nbsp;</p>
<p>By understanding these actuarial risk categories, actuaries can build models and pricing that reflect real-world uncertainty. This comprehensive view is essential: effective actuarial risk management depends on identifying every major risk type so that insurers remain well-funded and solvent under all plausible scenarios. Understanding these risk types is the foundation of sound actuarial practice, ensuring that companies can weather unexpected events and continue to meet their obligations.</p>
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Learn the key types of actuarial risks—mortality, longevity, lapse, investment, and more. A clear, expert guide for actuaries and actuarial students.

Types of Actuarial Risks Explained: A Complete Guide