While the science of calculating pensions, insurances and equity release might seem beyond most of us mere mortals, it is in fact a very precise science which follows strict rules.
Statistically, we are likely to die at a certain age, which depends largely on factors such as hereditary diseases and whether we smoke or drink. This is taken into account when making the calculations.
The people who calculate this have to be accurate and methodical, ensuring that the most likely scenario will be that we die before the pension starts paying out more than we paid into it.
For insurances, they have to work out the risk of us actually having to claim on the insurance, so that they make a profit. Of course, they do not get it right all the time and sometimes human beings can defy the most carefully calculated statistics, by selfishly living to a ripe old age – and claiming their pension for many more years than expected! It may also be the case that a particualr hunan has carelessly had a series of accidents which means that they have to claim on their insurance.
Insurance companies also end up having to pay out millions in the case of natural disasters such as earthquakes and severe flooding, but at least they can increase premiums when necessary to rectify the loss.
