PRICING OF MICROINSURANCE PRODUCTS

Transcription

1 PRICING OF MICROINSURANCE PRODUCTS Kelly Rendek: Barbara Chesire-Chabbaga: Livingstone, Zambia 11 March 2015

2 AGENDA 1. Principles and components of pricing 2. Example life and disability microinsurance 3. Unique considerations for pricing microinsurance products 4. Example health microinsurance 5. Q&A

3 PRINCIPLES AND COMPONENTS OF PRICING INSURANCE PRODUCTS

4 COMPONENTS OF GROSS PREMIUM Gross Premium Net Premium Expenses Profit margin Risk Premium = expected cost of claims Start up and development costs Marketing and Distribution Profit Margin Risk/Security Margin Expected investment earnings Operating costs Net cost of reinsurance Cost of capital Taxes Surplus and equity build up (mutual or self insured programs)

5 BASIC FORMULA Risk Premium = Expected Cost of Insurance: Expected cost of insurance Likelihood or frequency of insured event Expected amount of insurance claim Calculated per insured unit : insured person, insured property, insured animal, etc Calculated relative to the period for which the premium is paid for example, annually

6 SETTING RISK PREMIUM ASSUMPTIONS Claim frequency Expected incidence of claims in the insured population Expected claim amount Simple or complex calculations depending on insured benefits Different methods used to estimate May include inflation or other adjustments for underlying trends such as for medical expenses

7 CLAIM FREQUENCY ASSUMPTIONS Define Exposure basis the reference population for which the claims experience applies to For example, the number of lives that were insured during the period = lives exposed to risk Use actuarial methods to determine this Define claims occurrence May need to omit or modify certain types of claims or events Frequency Rate Number of Claims Exposure

8 EXPECTED CLAIM AMOUNT ASSUMPTIONS For products with a fixed sum insured, the Expected Claim Amount = Sum Insured For products with variable insurance benefits, the Expected Claim assumption can be based on: The average claim estimated from past experience The expected value (mean) or a percentile from an assumed probability distribution of claim amounts An estimate of the outstanding value of a loan at time of claim (eg credit life) Projected claim amounts produced by a pricing model that might include factors such as inflation or other adjustments

9 RISK MARGIN / MARGIN FOR UNCERTAINTY Claims experience will always vary from expected results, due to: Limitations in data set used to set assumptions Inherent uncertainty of risk variables Mis-estimation of mean or shape of claims distribution Unexpected volatility in actual claims experience over given period Margin for uncertainty is usually added as a risk margin on expected claims but is sometimes included with profit margin

10 EXPECTED INVESTMENT EARNINGS Usually a very significant component for long-term products Less important for short-term products For long-term products, usually included as an explicit assumption in the risk premium calculation For short-term products, investment earnings are often included implicitly in the profit margin

11 EXPENSE LOADINGS Three steps are required to include expenses in the gross premium: 1. Identify and quantify the expenses that will be incurred over the period for which you want the premium to remain unchanged 2. Estimate the number of policies and / or premium volume that will be available to recover these expenses over the same period 3. Decide on a formula to incorporate the expenses in the premium

12 EXPECTED EXPENSES Start up costs Product development Hiring and training qualified staff Systems development Distribution expenses Commisions Marketing materials Administration expenses Salary expenses for administration and management Equipment and IT costs Claims management expenses Reinsurance The net cost of reinsurance, if applicable, should be included in the gross premium as an expense

13 PROFIT/SURPLUS MARGIN Need some margin for profit or surplus in order to grow and remain sustainable Essential for long-term viability Builds up capital for future development Provides capital to cushion adverse experience Diverse opinions on the appropriate level of profit margin for MI Margin assumption can be set as a ROE or ROC target rather than a % of premium

14 VALIDATING THE GROSS PREMIUM: Scenario testing Set assumptions for sales and growth of program over time Include best estimate and worst case scenarios Compare to an estimate of willingness to pay and ability to pay of target clients Determined from market research/focus groups Pilot testing Refine product features and pricing if needed Continuous monitoring and review Make adjustments as needed based on actual experience

15 EXAMPLE 1: LIFE INSURANCE

16 FAMILY PACKAGE Family consists of principle, spouse and 3 children Accidental Death & Total Permanent Disability benefit of 100,000 per family per year Weekly disability benefit of 2,000 per week, up to a maximum of 25 weeks in case of hospitalization of the principal member or spouse resulting from an accident. Funeral Expense cover of 30,000 on first death in the family Cash back of 1,200 per annum in case of no claim How do we calculate an annual gross premium?

17 WHAT ASSUMPTIONS DO WE NEED? Mortality rates Possibly different by male, female and child Natural death mortality and accidental death mortality Disability Incidence of total disability Incidence and duration of hospitalisation resulting from an accident Expenses Commissions Administration and management expenses What data do we need for these?

18 SAMPLE ASSUMPTIONS Mortality qx(adult)=0.006 qx(child)= Overall weighted mortality = (2/5)* (3/5)*0.003 = Accident P(Accidental Death) = 15% of qx = P(Accidental PTD) = 10% of qx = P(Accidental TTD) = 40% of qx = Expenses Mgmt expense = 15% Commissions = 10% Profit margin = 5%

19 Now to make sense of all this

20 FAMILY PACKAGE: PREMIUM CALCULATION Risk Premium = Accidental death + PTD + TTD + FE + Cash back benefit Accidental death = PV(Benefit)*(Probability of one death occurring) = PV(100,000)*(1-( )^5) = 306 Accidental PTD = PV(Benefit)*(Probability of one permanent disability) = PV(100,000)*(1-( )^5) = 204 Accidental TTD = PV(Benefit)*(Prob of one parent becoming TTD) = PV(50,000)*(1-( )^2) = 229 Funeral Expense = PV(30,000)*(1-( )^5) = 607

21 FAMILY PACKAGE: PREMIUM CALCULATION Now we need to calculate the cash back benefit which only happens if there is no claim. What do we need for this? P(No Claim) = 1 P(claim occurring) = Cash back benefit = PV(1,200)*P(No claim) = 1200*(1/(1+0.06))*(1-0.03) = 1,097 TOTAL RISK PREMIUM = 2,443

22 GROSS PREMIUM CALCULATION Gross Premium = Risk Premium/(1- (expenses + profit margin)) = 2,443/(1-30%) = 3,490

23 MICROINSURANCE CONSIDERATIONS

24 PRODUCT DEVELOPMENT CYCLE RESEARCH Establish willingness vs. ability to pay Product development must be done with willingness and ability to pay in mind...pointless developing products with the right features but with a price barrier PRODUCT DESIGN Actuarial insight in light of the research MARKETING PLAN & DISTRIBUTION PLAN Pricing considerations may have to be reviewed at this point depending on the outcome of the pilot MARKET TESTING M&E: learning diaries, KPIs, market feedback RE-DESIGN SCALE-UP

25 ELEMENTS OF PRODUCT DESIGN 1. Insured Benefits What risks are covered? What benefits/insured amounts are provided? 2. Eligibility Who will be covered? Any exclusions? Single or Family coverage? Group coverage or Individual coverage? Mandatory or voluntary? 3. Term of Insurance Credit-linked usually = term of loan Short-term (eg. 1 year) is less risky because easier to change premiums or benefits if necessary

26 ELEMENTS OF PRODUCT DESIGN 4. Premium Structure Annual vs monthly premiums Same rate for everyone vs distinct rating categories 5. Form of Benefit Payment Reimbursement, cashless, in-kind benefits Staggered over future period Cash-back benefits (eg. If no claim made) 6. Claims controls / cost sharing features Deductibles/co-payments Waiting periods and/or tiered benefits that increase with renewals Limits (annual max, per person max, etc) Exclusions

27 WILLINGNESS TO PAY Willingness to pay relates to the amount people mentally dedicate to all risk coping mechanisms Research suggests WTP ranges from 1% to 4% of individual income for microinsurance products Willingness to pay is often over-stated and survey results may not be reliable

28 ABILITY TO PAY Ability to pay Willingness to pay Research can help deduce the difference between willingness and ability to pay When product features are explained, potential clients may indicate how much they re willing to pay for the service When a potential client is asked about savings and spending habits, you may find that client put aside more money to address certain risks such as illness, death and other unforeseen events, meaning ATP > WTP How do you make ATP closer to WTP? Trust is key

29 A BALANCING ACT Gross premium must be: High enough to cover all claims and expenses with some margin of certainty and to generate some surplus for growth Affordable for target clients Within their ability to pay Low enough that clients are willing to purchase the product Reflecting willingness to pay

30 EXAMPLE 2: HEALTH MI

31 CLINIC MEMBERSHIP PLAN A clinic based in the slums wants to provide a membership plan to its clients to increase footfall to its clinic Membership will cover a member, spouse and children Benefits include: Consultation Lab tests Focus group research results: Clients are willing, on average, to pay 160 per month to access this service People save on average 1,200 per month for emergencies 40% of respondents had one person in the family visit the clinic for outpatient services per month

32 CLINIC MEMBERSHIP PLAN: ASSUMPTIONS Current cost of accessing the clinic: Adult consultation 100 Child consultation 50 Ave no. of visits 2 visits per month per family Ave cost per visit 180 Expenses Commissions 10% Mgmt expenses 20%

33 SOLUTION: CLINIC MEMBERSHIP PLAN E(Cost of claims) = 180 * 24 = 4,320 per annum Premium = 4320/(1-expenses) = 6,171 per annum = 514 per month

34 TESTING THE RESULT What is the willingness to pay? WTP = 160 What is the ability to pay? ATP = 40% * 1200 = 480 What happens if the calculated gross premium is higher than ability to pay or willingness to pay? Premium > ATP > WTP 514 > 480 > 160 What changes could we make to the product design? How could we use the market research information to help with marketing the plan?

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36 Questions