What does "actuarial soundness" mean in the context of insurance?

Actuarial soundness refers to the principle of setting insurance premiums based on thorough statistical analysis and assessment of risk factors. This encompasses evaluating a wide range of data, including historical claims, mortality rates, accident frequency, and other relevant statistics, to determine the likelihood and cost of future claims. By employing this statistical groundwork, insurers can establish prices that not only reflect the inherent risks involved but also ensure the financial stability and sustainability of the insurance company over the long run.

This approach is crucial because it helps maintain solvency and the ability to pay claims when they arise, thus safeguarding both the insurer's operations and the policyholders' interests. Actuarial soundness is the foundation for sound financial practices within the insurance industry, ensuring that premiums are adequate, not discriminatory, and appropriately linked to the risks covered.