By: Aakash Mishra, General ManagerIsland Life Assurance Co Ltd Mauritius at OESAI LIFE INSURANCE TECHNICAL TRAINING,TANZANIA - 11th Nov 2015

Pricing issues in Group Life Insurance

Background:

Clients want all benefits like rate guarantee, reduced premiums etc. Intermediary won’t lower their commissions.

Your rival insurer is willing to cut corners and reduce his margins. How will you price it when a high past claims experience stares at you!

Background (cont.)

Employer sometimes is myopic, looks at immediate short term gains.

What they forfeit are the values like efficiency, long term relationships, prompt claim resolution, and a strong communication culture of a professional insurer.

Group Life; Basic concepts

Developing prices for group insurance is basically the same as pricing any product a company produces and sells.

Start with the cost of the raw materials viz

Claims

Expenses

Profit

Add various types of expenses:

a) The cost of producing the finished product;

b) The cost of managing, administering and servicing the product;

c) The cost of distributing the product; and

Then add a profit margin,

and you have the TOTAL PRICE

Each group Life scheme is unique

Demographics,

Claim experience

Design of the scheme/available benefits,

These are the main variables.

Claims First raw material- Projected cost of Potential claims

Expenses generally include the cost of a) Developing and implementing a customized

plan; b) Communicating the plan to members of the

group; c) Processing enrollments, medical

underwriting, premium payments and claims; d) Providing customer service to insured

individuals; e) Distributing the product – the actual

coverage – to the customer.

Profit Margins (or risk charge) - If the actual claims are above or below projected value, directly affects your Profits.

Common pricing practices for group life insurance plans focus on age, gender, industry and sometimes geographic area. While these pricing practices are still valid, some underwriters believe additional information — like income, education, occupation and marital status — would help increase the accuracy of mortality estimates and, therefore, provide a more competitive rate.

ERM( Enterprise Risk Management) is also gradually being built in the pricing models- how much is the risk concentration, which needs to be adequately reinsured and charged.

Conventional Premium paymentPolicyholder pays premiums throughout the accounting period at a specified rate.

• At the end of the period, insurer calculates the financial experience result.

• If premiums have exceeded the total amount needed to cover claims, expenses and risk charges, the excess is paid to the policyholder (or it may be held in a reserve for the plan).

• If the experience result is negative, the deficit is carried forward to be recovered from future surpluses.

Retro or low Remit premium payment- • Policyholder pays premiums throughout the

accounting period at a specified rate• Premium rate may be lower than the rate used for

conventional premium payment basis, because the insurer can collect additional premium.

• At the end of the period, insurer calculates the financial experience result.• If premiums have exceeded the total amount needed to cover claims, expenses and risk charges, the insurer pays a dividend to the policyholder.• If the result is negative, policyholder pays an additional premium/ “Retro” premium to cover the excess charges.• If a deficit still exists after payment of this premium, it is generally carried forward for future recovery.

Common riders

ADB, TPD, FUNERL COVER, PPD, PTD, CI RIDER ETC

Price of product depends on which additional riders the employer requires. For eg, a Critical illness cover could be more expensive than a TPD cover.

Free Cover Limits

• FCL or the Non-medical limit determines, upto what SA, members of a group will not be subjected to medical test before risk commences

• Raising of FCL entails higher risk for the insurer and hence a higher rate.

Reinsurance

• A reinsurance company generally states its Risk rates, on which the ceding partner adds their profit margins, broker commission & levies etc.

• If the minimum risk rate given by reinsurer is high, naturally there will be a higher gross rate charged by the insurer to the end customer.

Actuary pricing the product, strikes a balance • to meet Shareholder’s profit targets• to be competitive in the market• to offer good value for policyholdersby• Doing a market research• Doing projections on volumes• Monitoring assumed vs actual claims

experience (for renewal)• Taking average Group Mortality rate

depending on country, occupation, gender, age, cultural preferences of the group etc etc

At the time of Renewal …

PRICE ISN’T EVERYTHING

01. Top-notch Service:

• Responsiveness

• Superior account Management

• Ease of administration

• Dependability

02. Flexibility

• Long-term relationships

• Trust

• Delivery on promises

• Synergy between Organizations

• Room to negotiate

03. Technology:• Online self-service for employees

• Online reporting and claims submission forAdministrators

• Secure data transfer

04. Value-added Services:

• Wellness coaching

• Financial counseling

• Targeted employee Education

• Beneficiary services

Any Questions ?

Thank You