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  1. Workshop on Microinsurance Insurance and Regulatory Development (IRDA)Institute of Insurance and Risk Management (IIRM)United States Agency for International Development (USAID)Hyderabad14 & 15 October 2005Pricing Microinsurance ProductsAn OverviewJohn J. WipfConsultantBearingPoint Inc.Indian Insurance Reform Projectwww.bearingpoint.com

  2. Presentation Outline • Market research • Importance of data • Rate components and key determinants • Health insurance- additional considerations • Modeling techniques • Conclusions

  3. Pricing begins with Market Research 1. Conduct client interviews to determine the following: -How much premium can the clients/members afford? -What frequency can they pay? Annual, quarterly, monthly, weekly, etc. -What risks do they face and what are their coping mechanisms? 2. Since premium is limited, have to determine priorities: -What are the risks that they want to insure? -Which benefits do they prefer, and what is the order of preference? -What benefit amounts do they expect? (minimums, maximums) -Who should be covered? Breadwinner, spouse, children? 3. Other info: Attitudes, institutional trust, risk-pooling knowledge, etc. -Philippines clients prefer to own and govern the MI -Cambodia where community trust has been destroyed they prefer that another entity such as an MFI manage and own the MI 4. Confirm demographic profile vs. the database -If no database, use the sample demographics

  4. Importance of Data • Credible data is the foundation of MI pricing • Data must be complete, consistent, timely, accurate • Best: specific data for the target group. -Demographics -Claims experience, etc. -Exposure to risk • Without specific data, actuary must rely on -Population statistics (census, WHO population mortality, etc.) -Theory: statistical, risk, life contingencies, etc. -Experience data from similar MI programs (if available) -Reasonable assumptions

  5. Data Accumulation & Management • Data must be managed as a valuable resource. • Database design: relational database easy to update and expand -databases need to be updated periodically as info requirements change • Database design: should be designed with actuarial input. -to make sure that the correct data elements are captured for pricing purposes • Documentation: Actuary must know how to interpret the data and how it was accumulated. -this will help to determine the credibility of the data • System Requirements: • Data gathering rules • Consistent formats- eg. Dates, names, primary keys • Reasonableness checks- maximums, minimums, menu of choices, etc. • Tools and reports for data verification and analysis vs. other sources • Data must be warehoused and accumulated- more data, greater credibility

  6. Minimum Data Requirements • Institutional and branch information • MI participants’ information (DOB, gender, photo, promoter, address etc)- • Dependents and beneficiaries information • Coverage history for each product -each person, each product… used to reconstruct exposure to various risks • Transactions history for each product -to determine who is covered or lapsed, time value of money considerations, etc. • Product rules history for each product -used to reconstruct exposure to various risks, for administration reasons, etc. • Claims history -for health, record all costs whether covered or not, split by benefits category -need cause of claim; for health use ICD codes • Interest rates history -for valuation of savings products, actual rates to credit • Others

  7. Price: Main Components • Mortality cost-by age, sex, region, etc. • Morbidity cost-by age, sex, region, etc. • Dropout costs (lapses, surrenders) and reinstatements -may have positive or negative effect on the price • Risk premium-provision for adverse deviation from expected claims, or PAD • Uncertainty premium-if data isn’t credible • Profit- contribution to member equity • Expenses- marketing, administration, claims payment, depreciation, etc. • Investment earnings-use to discount expected claims and expenses • Others- depends on products

  8. Price: Important Factors • Product features and benefits, maximums, co-payments • Timing and frequency of premium payments -expenses, interest earnings • Group size- scale of economy, expenses, risk premium needed, etc. • Participation and renewal rates- affects expenses, mortality, morbidity • Projected MI growth • -affects trends in mortality and morbidity since it affects demographic mix • Stability of the group- affects expenses, renewals, etc. • Occupations, livelihoods of the members/participants -affects mortality, morbidity • Premium collection system -affects expenses, lapses, investment earnings • Communication of benefits -affects claims -client satisfaction which in turn affects dropouts and renewals • Exclusions and pre-existing conditions- affects claims • Inflation- expenses, claims, investment earnings

  9. Health: Additional Considerations • Expected claims by benefit: incidence, claim amounts • Trends in utilization -pricing should anticipate • High inflation rates -need benefit maximums -need to negotiate tariffs. • Changes in treatment, advances in technology -need treatment protocols • Claims management -determines how well moral hazard is controlled. • Co-payments: deductibles, co-insurance -will reduce rates • Geographic location -affects access to provider, mortality, morbidity, etc. • Rates should be reviewed every 6-12 months if possible

  10. Actuarial Modeling Techniques • Models are not a substitute for data. • Models enable more effective use of existing data. • Models outputs are indicative in nature, are not promises. • Can price multiple products, multiple sub-groups at once -example, can use different assumptions by state, by branch, etc. • Models parameters such as group demographics are set using existing data and market research • Projected expenses, MI growth etc. determined from management input and MI business plan • Process: iteratively adjust rates and benefits until a suitable combination is achieved. • Model outputs are projected financial results for the MI -expected income statements, balance sheets, cashflow statement, IRR, surplus requirements, expected trends, etc. • “What if” scenarios possible

  11. Conclusions • Inputs from marketing research are needed • Accurate pricing is only possible with credible data • MI must collect and manage data in order to succeed • Health is especially challenging to price • For health, rates should be reviewed every 6-12 months if possible • Pricing is complex; an actuary should assist the MI • Actuarial / business modeling techniques work well and should be developed

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