value creation through behavioural life insurance · principals of behavioural economics in health...
TRANSCRIPT
Value Creation Through
Behavioural Life Insurance
Adam Stolz
Greg Morris
This presentation has been prepared for the Actuaries Institute 2015
Actuaries Summit.
The Institute Council wishes it to be understood that opinions put forward
herein are not necessarily those of the Institute and the Council is not
responsible for those opinions.
Contents
1. Challenges to Traditional Life Insurance Value Proposition
2. New Dynamic Value Proposition
3. Case Study: Discovery South Africa
4. Application to Australian Market
2
The nature of risk is changing
Oxford Health alliance
Disease burden linked to lifestyle
factorsTechnology will impact the
assessment of health risks
3
Price fixed at
inception
YearsYr 0Yr 1Yr 2Yr 3Yr 4Yr 5Yr 6Yr 7Yr 8Yr 9 Yr
10Market premium
Force of
staying for sick
Force of
leaving for
healthy
Premium
Risk adjusted
premium$120 $450
Average premium
per family$300 $300
Traditional model is vulnerable
4
Traditional life insurance reliant
on static, upfront underwriting
One ultimate mortality
assumption for lives that
are potentially
heterogeneous with
respect to long term
mortality/morbidity risk
Ris
k
Duration / age
Ultimate
Select
Current rating factors
only use information that
is available at policy
inception
No way to collect
additional information
post-inception hence the
risk assessment is not
updated dynamically
risk
Socio-economic
status
Smoker status
Gender Health status
Changes in smoking status
Wellness behaviour
5
Individual behaviour is irrational
Impact of time horizon (hyperbolic discounting)
Day 0 Day 1
$10 $11
✓ X
Day 30 Day 31
$10 $11
✓X
Near term decisions
Longer term decisions
6
Disconnect between traditional life
insurance model & customer behaviour Principals of behavioural economics in health and wellness
ExplanationIndividuals are generally overconfident in their own
abilities and prospects, including their health
Principal O V E R C O N F I D E N C E
A N D O P T I M I S M
Individuals generally dislike losing something twice as much as they like gaining something. This makes health behaviour
changes that require loss particularly challengingL O S S A V E R S I O N
Individuals tend to pay little attention to the small but cumulative
consequences of repeated decisions, and frequently ignore the impact of repeated risky behaviours
F R E Q U E N T E V E N T
M I S C A L C U L A T I O N
Future rewards of a healthy lifestyle are significantly undervalued relative to cost today
H Y P E R B O L I C D I S C O U N T I N G
Positive reinforcement and indirect suggestions can influence the motives, incentives and decision making of
individuals to positively impact on their health and wellnessN U D G E T H E O R Y
People continue to follow the path of least resistance when
it comes to decisions about their health and wellnessS T A T U S Q U O B I A S
Rewards through financial incentives have been proven to be
successful in incentivising healthy behaviourF I N A N C I A L
I N C E N T I V E S7
New Dynamic Value Proposition
Key Attributes
8
, leading to
Provide access to health
partners to allow
policyholders to engage in
healthy behaviours and
monitor the level of their
engagement
Ongoing access to
Health and wellness
programme
Incentives and rewards
provide a strong motivation
to policyholders to monitor
and improve their health
Use learnings of
Behavioural
Economics to nudge
policyholders towards
healthy behaviours
Pass back the more
accurate risk assessment
in form of upfront
discounts, ongoing
premium adjustments and
cash back benefits
Dynamic pricing and
rewards to reflect
policyholder
engagement over
time
8
“The
Vitality Points StructureVitality Program Structure
Discovery Life is a leading Life Insurer in South Africa
For nearly two decades, Discovery has offered the successful Vitality Program
As you interact with Vitality and get healthier, earn Vitality points which determine Vitality Status
9
New Dynamic Value Proposition
Vitality Program
Mo
rtal
ity
Rat
e -
qx
Age
Traditional curve
Dynamic underwriting curve
Average Discovery price
Unengaged
Engaged
(5% - 10%) Market Competitive
Pricing Corridor
Case Study: Discovery South Africa
Dynamic Underwriting
10
-
500
1,000
1,500
2,000
2,500
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Cu
mu
lativ
e p
rem
ium
(d
isc
ou
nte
d)
Year
Cumulative premium by status
Non-int Bronze Silver Gold Platinum
Case Study: Discovery South Africa
Significant customer value across Vitality statuses
11Most engaged
MorbidityMortality
Case Study: Discovery South Africa
Life insurance claims experience
Unengaged Moderately engaged Highly engaged Unengaged Moderately engaged Highly engaged
Non-Vitality
Non-Vitality
12
Non-Vitality
Case Study: Discovery South Africa
Lapse experienceLa
pse
s as
a %
of
no
n-V
ital
ity
Unengaged Moderately Engaged Highly Engaged
Lapse
13
http://www.youtube.com/watch?v=argDqTJRUxw&feature=youtu.be
• 5% switched when provided with nutritional information• 43% switched when offered an incentive
• Consistent with many behavioural economics studies showing the power of incentives on behaviour
Application to Australian Market
Behavioral economics experiment
14
Lump sum
Income
Protection
PRODUCT FEATURES
Product Bronze Silver Gold Platinum
Initial Discount 0.0% 0.0% 0.0% 0.0%
Annual Premium “flex” 0.0% -0.5% -1.0% -2.0%
Premium Lower Bound 0.0% -5.0% -10.0% -15.0%
Cash Back Every 5th year 0.0% 0.0% 0.0% 0.0%
Product Bronze Silver Gold Platinum
Initial Discount 7.5% 7.5% 7.5% 7.5%
Annual Premium “flex” +1.50% +0.75% 0.0% -1.0%
Premium Lower Bound -20.0% -20.0% -20.0% -20.0%
Cash Back Every 5th year 2.0% 4.0% 8.0% 10.0%
15
Application to Australian Market
AIA Australia Integrated Vitality
Take-up rate of approximately 30% of new retail
annualised premium observed in first 12 months
Expectation that take-up rate and customer engagement
will increase over next years
Application to Australian Market
Progress so far
AIA launched Vitality
Program in Australia
in March 2014
AIA pricing basis
adapted to partially
reflect Discovery
South Africa
experience
Discovery South Africa has over 15 years of claims and lapse
experience
Experience in Australia may vary due to difference in Socio-
economic, Product definition and Vitality engagement factors
Product features and assumptions adjusted to allow for
anticipated differences between Australian and Discovery South
Africa experience
Claims and Lapse experience for Australian policyholders to be
monitored over time and reflected in on-going adjustments to
pricing basis and product design
16
Questions?
17