Value Creation Through Behavioural Life Insurance Adam Stolz Greg Morris

Transcription

1 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.

2 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

3 The nature of risk is changing Disease burden linked to lifestyle factors Technology will impact the assessment of health risks Oxford Health alliance 3

4 Traditional model is vulnerable Premium Price fixed at inception Yr 0Yr 1Yr 2Yr 3Yr 4Yr 5Yr 6Yr 7Yr 8Yr 9 Yr Years Market premium 10 Force of staying for sick Force of leaving for healthy Risk adjusted premium Average premium per family $120 $450 $300 $300 4

5 Risk 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 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 Smoker status Gender Health status Ultimate Socioeconomic status Changes in smoking status Select Duration / age Wellness behaviour 5 risk

6 Individual behaviour is irrational Impact of time horizon (hyperbolic discounting) Near term decisions Day 0 Day 1 $10 $11 X Longer term decisions Day 30 Day 31 $10 $11 X 6

7 Disconnect between traditional life insurance model & customer behaviour Principals of behavioural economics in health and wellness 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 L O S S A V E R S I O N 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 Explanation Individuals are generally overconfident in their own abilities and prospects, including their health Individuals generally dislike losing something twice as much as they like gaining something. This makes health behaviour changes that require loss particularly challenging Individuals tend to pay little attention to the small but cumulative consequences of repeated decisions, and frequently ignore the impact of repeated risky behaviours 7 H Y P E R B O L I C D I S C O U N T I N G N U D G E T H E O R Y S T A T U S Q U O B I A S F I N A N C I A L I N C E N T I V E S Future rewards of a healthy lifestyle are significantly undervalued relative to cost today Positive reinforcement and indirect suggestions can influence the motives, incentives and decision making of individuals to positively impact on their health and wellness People continue to follow the path of least resistance when it comes to decisions about their health and wellness Rewards through financial incentives have been proven to be successful in incentivising healthy behaviour

8 New Dynamic Value Proposition Key Attributes Ongoing, leading access to to Health and wellness programme Use learnings of Behavioural Economics to nudge policyholders towards healthy behaviours Dynamic pricing and rewards to reflect policyholder engagement over time 8 Provide access to health partners to allow policyholders to engage in healthy behaviours and monitor the level of their engagement Incentives and rewards provide a strong motivation to policyholders to monitor and improve their health Pass back the more accurate risk assessment in form of upfront discounts, ongoing premium adjustments and cash back benefits 8

9 New Dynamic Value Proposition Vitality Program 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 Vitality Program Structure Vitality Points Structure The 9

10 Case Study: Discovery South Africa Dynamic Underwriting Mortality Rate - qx Unengaged Traditional curve Dynamic underwriting curve (5% - 10%) Market Competitive Pricing Corridor Average Discovery price Engaged Age 10

11 Cumulative premium (discounted) Case Study: Discovery South Africa Significant customer value across Vitality statuses 2,500 Cumulative premium by status 2,000 1,500 1, Year Non-int Bronze Silver Gold Platinum Most engaged

12 Case Study: Discovery South Africa Life insurance claims experience Mortality Morbidity Non- Vitality Non- Vitality Unengaged Moderately engaged Highly engaged Unengaged Moderately engaged Highly engaged 12

13 Lapses as a % of non-vitality Case Study: Discovery South Africa Lapse experience Lapse Non-Vitality Unengaged Moderately Engaged Highly Engaged 13

14 Application to Australian Market Behavioral economics experiment 5% switched when provided with nutritional information 43% switched when offered an incentive 14 Consistent with many behavioural economics studies showing the power of incentives on behaviour

15 Application to Australian Market AIA Australia Integrated Vitality PRODUCT FEATURES Product Bronze Silver Gold Platinum Lump sum 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 Income Protection 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%

16 Application to Australian Market Progress so far AIA launched Vitality Program in Australia in March 2014 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 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 Socioeconomic, 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

17 17 Questions?