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Introduction of Insurance Product Design

Introduction of Insurance Product Design. Giang Trí Tường (Eli Chiang) Actuarial Department November 2012. Objectives. Understand the p roduct design process Know the basic pricing methods Describe the risk of insurance operation Know monitoring methods of insurance operation.

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Introduction of Insurance Product Design

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  1. Introduction of Insurance Product Design Giang Trí Tường (Eli Chiang) Actuarial Department November 2012

  2. Objectives • Understand the product design process • Know the basic pricing methods • Describe the risk of insurance operation • Know monitoring methods of insurance operation

  3. Product Design Process

  4. Demand Analysis

  5. Demand Analysis

  6. Advanced Thinking: Basic Plan or Rider • Which product type (basic plan or rider) is better?

  7. Advanced Thinking: Basic Plan or RiderMedical insurance 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.

  8. Advanced Thinking: Basic Plan or Rider Female insurance • Empirically, women has lower payment ratio and combined medical insurance with other benefits can reduce the medical risk. • We need a simple way to training agents. • “Simple, Easy to sell” is more important.  Basic plan is better.

  9. Pricing & Evaluation

  10. Three elements of premium • 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. Loading NP Incidence & Interest rate GP

  11. Time Value of Money: Future Value • Assume 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 FV of $1 Years

  12. Time Value of Money: Future Value (Continued) FV of $1 Years

  13. Time Value of Money: Present Value • Assume 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 PV of $1 Years

  14. Time Value of Money: Present Value (Continued) PV of $1 Years

  15. Mortality Rate Male, 35-years old 100 Million Whole Life 1980 CSO (Qx) Expected Payment # Assume 1 million people survival in the beginning. number of death = number of survival * Qx Expect payment = Death benefit * number of death

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

  17. 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

  18. Profit/Loss from Death • 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. Get Profit from Long Survival Age

  19. 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. Interest rate = 7% Get Profit from Long Survival Age

  20. 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

  21. 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 Net premium increases

  22. Advanced discussion: Interest rate adjustment (Continued) Male, 35-years old; 100 Million Whole Life

  23. Advanced discussion: Mortality improvement What happens to premium if the mortality decreases? Expected payments will defer 198CSO x 100% 198CSO x 70% defer Net premium decreases

  24. Advanced discussion: Mortality improvement (Continued) Male, 35-years old; 100 Million Whole Life

  25. Maintenance & Monitoring Improve the Product Design

  26. Agent Productivities  The active ratio and productivity is not good!

  27. The Snowball • Life is like a snowball. The important thing is finding wet snow and a really long hill. Build Customer Network

  28. Simple Success Process for Agent

  29. 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

  30. Thank you

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