Inclusive Insurance 2014 INTERNATIONAL FORUM Ulaanbaatar, Mongolia April 2014

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1 By Denis Garand, FSA, FCIA Denis Garand & Associates Assisted by Donna Swiderek Inclusive Insurance 2014 INTERNATIONAL FORUM Ulaanbaatar, Mongolia April 2014

2 Product Difficulty Source: The Landscape of Micro Insurance in the World's 100 Poorest Countries Roth, McCord, Liber Degree of Difficulty Credit Life Term Life/Personal Accident Savings Life Property Insurance Endowment Life Health Insurance Agriculture Degree of Success

3 Elements of Pricing Cost of claims, based on the plan benefits Cost of plan administration, distribution and all expenses associated with the plan The cost of reinsurance if there is any A margin to generate a surplus and cover uncertainty based on risk of product Investment earnings expected 3

4 Cost of Claims Claims expected to be incurred = Probability of the event x the expected cost for each covered service Probability of the event Sources: National data, Actuarial tables, WHO Expected cost for each service Sources: Experience history, National data, approximations from WHO 4

5 Cost of Claims Experience Understand the Inclusive Insurance product conditions, distribution method, target market and claims methodology. Look at a one year time period, calculate the number of claims incurred in the year divided by the average number of people covered in the period. 5

6 Cost of Plan Administration and Distribution Developing a budget from the business plan helps project expenses over time. It would be preferable to do over a 5 year period. As seen from the following slide: The grand total expenses : The grand total insured: = Cost per insured that needs to be added to the premium:

7 Example of Pricing expense component Projected budget for a start up Operation Expense Item Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Total Staff Equipment Other Expenses Distribution Total Expense # of insured Expense per insured

8 Cost of Reinsurance - The additional amount of premium to add depends on the reinsurance agreement. - Usually an additional percentage of premium 8

9 Margin to Generate surplus -Claims results always vary from expected, therefore extra premium is added just in case. - Essential for the success of the plan - Building in a small surplus covers fluctuations of claims and also gives funds for future development. - Amount of Margin 1% to 10% of premium. - More stable plans would get a smaller margin. -Start up plans require a higher margin. 9

10 Investment Earnings The returns on the safe investments that can be made will determine the impact on the rate. In most cases it will be a very small impact on the premium. For example: if there is annual premium of 100, which can be invested for on average 6 months at 6%, the return would be 3%. This 3% can be added to the premium as revenue to cover claims cost and plan administration. If the organization has capital that earns revenue this would not be included in the pricing. 10

11 Premium Calculation Cost of claims + Expenses + Cost of reinsurance + Margins - Investment earnings 11

12 Voluntary Products Starting to get more complex Must consider the context Distribution Management Range in price for 100 to 300%

13 Health the context Health insurance pricing depends more on management, distribution and risk management compared to actual demographics Range in price from 100 to 700

14 Health the context Must consider Community/Environment/Nutrition Prevention Primary care Hospital coverage Distribution to client base Management and monitoring Consultant can do most harm!

15 Agricultural insurance Agriculturane insurance pricing depends more on management, distribution and risk management compared to actual demographics Range in price from 100 to 2000

16 Monitor Results Key Performance Indicators Incurred Claims ratio Incurred Expense ratio Net Income ratio Coverage ratio Growth ratio Claims rejection ratio Renewal rate Claims processing time Liquidity ratio Solvency ratio

17 GIZ approach Working with FRC Develop a prototype product Each participating company develops pricing, distribution and product features.

Introduction to Business Planning for Microinsurance

Introduction to Business Planning for Microinsurance Objectives Introduce the MI Business Planning Module Create awareness of the value of preparing and having a business plan Outline the key components