PRICING ISSUES IN GROUP LIFE ASSURANCE

By David Mureriwa 15 April 2015

AGENDA Objectives

What is Group Life Assurance?

Why Group Life Cover?

What are the General Pricing Issues?

How do Actuaries price Group Assurance Policies?

Example

Conclusion

OBJECTIVES OF PRESENTATION

Purpose of this presentation is to discuss:

General GLA Pricing Issues (& other considerations)

Pricing of GLA Premium

WHAT IS GROUP LIFE ASSURANCE (GLA)?

Lump sum cover for:DeathDisability Illness or sickness

To a Group of people with some common characteristics e.g.

Employees of one employerEmployees of a group of companies, Trade union members, members of a society Members of a professional body

The Lump Sum Cover is provided in exchange of a Recurring Single Premium

WHY GROUP LIFE COVER?

GLA is a simple way of providing Life Assurance cover to a group of people sharing common characteristics.

Premiums are often cheaper than Individual’s Life Assurance because;

No room for anti-selection (people join group for other reasons other than taking insurance)Tax incentive benefit (often provided with retirement benefits)People at work are usually considerably fit (better mortality)Minimal underwriting (less costly)Single point of premium collection Renewable, implying low capital or reserving demands Tool for penetrating into new markets

WHAT ARE THE GENERAL PRICING ISSUES?

Conflicts in Pricing Insurance Products

CONFLICTS IN PRICING ( Cont.…)

Managing conflict of interestsShareholder Interests vs. Marketing needsInnovation of products vs. Administration systemsGuarantees vs. Capital requiredProfits vs. Volumes

Marketing PerspectiveCompetitiveness of ratesrates to meet required return

CONFLICTS IN PRICING ( Cont.…)

Operational Perspectivepay Claimssecurity to Policyholdersmeet expenses- Administration and Fixed Overheadsmanage Cash flows

Actuarial Role-Striking a balance between different conflicts.

Premium;…to meet Shareholder’s profit targets… to be competitive …to offer good value for policyholders…should meet regulatory requirements etc.

FACTORS TO CONSIDER

Shareholder Issues

Policyholder Issues

Life Offices Issues

General Issues

OTHER CONSIDERATIONS

Market Research

Number of products to launch

Involve everyone for perfect product

Do new business projections-Profit and Loss and Balance sheet projections? (Model Office Projections)

Monitor product once launched- Assumptions Vs. Actual experience (ensure continuous profitability – continuous application of Actuarial Control Cycle)

HOW DO ACTUARIES PRICE GLA??

P = (qx * Group Lump Sum Cover )+ Margins

Recall Recurring Single Premium for Lump Sum Covers!

Value of Premium = expected value of Lump Sum

Covers

Expected value of lump sum covers – payable upon

death

So we need death rates = mortality rates

But mortality of a “Group” i.e. Risk characteristics

of group

It is therefore key is to determine “average group

mortality”

… CONTINUES How do we determine the average group mortality rate?

Type of group Industry (blue or white collar)Geographical location Number of employees (size)Average age Gender mix

What more do you add to your average mortality rate?Margins Expense loadings Profit loadings

Subject to marketing demands Reinsurer also has an influence in pricingProfit Participation Clauses also considered – (sharing of profits between Life Office and Fund)

Perfect rate (what you will charge!)Need to review the rate in line with experience thereafter. Why?

Because we would have used assumptions Experience changes with time(AIDS/ARVs) issues Ascertain whether desired profits are being met

EXAMPLE

The table below shows an example of a Group Experience.

Table adopted from paper by Marc Bastein to the 5th Global Conference of Actuaries page 432

Year of death

Natural

Death

Accidental

deaths

Total deaths

Year – end

number of

Employees

Average Employ

ees

Per Mill’ Acciden

tal Death rate

Per Mill’ Total Death Rate

19971998199920002001

98114139152126

4857664657

146171205198183

54,49857,58258,67458,71258,877

53,03956,04058,12858,69358,795

0.911.021.140.780.97

2.753.053.533.373.11

Non- weighed Total

629 274 903 288,343

284,694

0.96 3.17

…EXAMPLE CONTINUES

If the non-weighed Total Mortality rate is then determined to be suitable qx i.e. 0.003 17

And if total Group Lump Sum cover is say, USD1,000,000

Then Group Life Assurance Premium will be as below before any margins P = 0.003 17 x 1,000,000

= USD3.17

CONCLUSION

Setting a Group Life Assurance rate is more

complex than meets the eye,

The actuary should consider all the stakeholders

and ensure that he/she manages the conflicting

interests,

The actuary should be able to determine the

expected mortality experience that represents the

Group,

Appropriate margins and loadings should meet

required profit margins, and

There is need to continuously monitor and review

appropriateness of the rates.

QUESTIONS