introduction of insurance product design

Introduction of Insurance Product DesignGiang Trí Tường (Eli Chiang)

Actuarial Department

November 2012

Objectives•U

nderstand the product design process

•Know the basic pricing methods

•Describe the risk of insurance operation

•Know monitoring methods of insurance operation

Product Design Process

Demand Analysis

Demand Analysis

Advanced Thinking: Basic Plan or Rider

•Which product type (basic plan or rider) is better?

Advanced Thinking: Basic Plan or RiderMedical insurance

Benefits

Hospitalization

Home Health care

ICU, BICU

In-patient surgical

Main challenges

Uncertain incidence rate

Faulty Terms and Conditions

Unknown abuse cases

Regional differences

Because Lack of adequate experience, we can't make sure that we can undertake the long-term risk.

“Adjustability” is most important. Rider is better.

Advanced Thinking: Basic Plan or Rider Female insurance

Benefits

Death/TPD

Additional Death/TPD

Maturity Benefit

Spouse Additional Death/TPD

Full moon benefit

Feminine Medical

Main challenges

Brand differentiation

Agent training

Easier to sell

Uncertain incidence rate

Faulty Terms and Conditions

Unknown abuse cases

1. Empirically, women has lower payment ratio and combined medical insurance with other benefits can reduce the medical risk.

2. We need a simple way to training agents.

“Simple, Easy to sell” is more important. Basic plan is better.

Pricing & Evaluation

Three elements of premium

NP

Incidence &

Interest rate

Loading

GP

•Interest Rate: time value of money

•Incidence: payment ratio of insurance benefits

•Loading: operating expense, expected profit, ...

Net Premium = Interest rate + Incidence

calculate reserve, surrender value, etc.

Gross Premium = Net Premium + Loading

real premium that customer pay.

Time Value of Money: Future Value

•A

ssume Interest Rate = 10%, $1 of today's money

Future value is $1.1 in 1-year

Future value is $1.12 = $1.21 in 2-years

Future value is $1.110 = $2.59 in 10-years

Years

Time Value of Money: Future Value (Continued)

Years

Time Value of Money: Present Value

•A

ssume Interest Rate = 10%

$1 in 1-year, present value(today’s money) is $1/1.1 = $0.91 $1 in 2-years,

present value is $1/1.12 = $0.83 $1 in 10-years,

present value is $1/1.110 = $0.39

Years

Time Value of Money: Present Value (Continued)

Years

Mortality Rate

Age (x) Male Female

0 0.263% 0.188%1 0.103% 0.084%2 0.099% 0.080%3 0.097% 0.078%4 0.093% 0.077%… … …97 54.100% 53.724%98 74.515% 74.396%99 100% 100%

1980 CSO (Qx)1980 CSO (Qx)

Age (x) Survival DeathExpected payment

35 1,000,000 2,170 217,000 36 997,830 2,315 231,497 37 995,515 2,479 247,883 38 993,036 2,661 266,134 39 990,375 2,872 287,209 … 987,503 3,111 311,063 97 4,849 2,623 262,348 98 2,226 1,659 165,858 99 567 567 56,725

Expected Payment

Male, 35-years old100 Million Whole Life

# Assume 1 million people survival in the beginning.

number of death = number of survival * Qx

Expect payment = Death benefit * number of death

Expected Payments (1 million people, unit: Million VND)

Year

Net Premium (single premium)

Net Premium (single premium, one people) =

Total Present Value of Expect payments / Number of People

# Assume Interest rate = 10%

NP= 5.9 Million VND

Year

Profit/Loss from Death

Get Profit from Long Survival

•Collect NP = 5.9 Million to pay the death benefit in the future.

•Investment NP (company’s assets) with interest rate = 10%.

•It takes 30 years (Break-even year) to make the assets over death payment.

•We get Loss if insured die before 65 years-old (Break-even age) and get Profit if he Survival more than 65 years-old.

Age

Advanced discussion: Interest rate risk

•If the interest rate drops to 7%, then the break-even age rises to 77 years-old.

•If the interest rate drops to 5%, then the break-even age rises to 93 years-old.

almost impossible to get profit in this case.

Get Profit from Long Survival

Interest rate = 7%

Age

Advanced discussion: Risk of low number of insured

•In mathematics, the expected of Loss = 0.

•In practice, we only get Loss or Profit in one cases.

•If the number of insured is low, then we maybe get a big Loss by some unlucky cases.

•If the number of insured is high, the Loss/Profit will be Stable.

Get Profit from Long Survival

Age

Advanced discussion: Interest rate adjustment

What happens to premium if the interest rate decreases?

Expected payments remain the same

Present value of each Expected Payment increases

Present value of each Expected Payment increases

Net premium increasesNet premium increases

Advanced discussion: Interest rate adjustment (Continued)

Male, 35-years old; 100 Million Whole Life

Advanced discussion: Mortality improvement

What happens to premium if the mortality decreases?

Expected payments will defer

Net premium decreasesNet premium decreases

defer

198CSO x 100% 198CSO x 70%

Advanced discussion: Mortality improvement (Continued)

Male, 35-years old; 100 Million Whole Life

Maintenance & Monitoring

Improve the Product Design

Agent Productivities

The active ratio and productivity is not good!

The Snowball

•Life is like a snowball.

The important thing is finding wet snow and a really long hill.

Build Customer Network

Simple Success Process for Agent

Assist agent to increase activity

•If you don’t care about the customer for one year, then he will not be your customer.

•If you keep to contact customer for 5 years, then he will buy your product someday.

•If he buy your product, then his friend also has the opportunity to buy your product.

A07 makes agent have opportunity to contact customer for 5 years

Establish your future wealth network