Meeting cum-Seminar on Preparedness Towards De-tariffing Non Life Insurance Hyderabad March 14, 2006 Pricing Microinsurance Products An Overview Denis Garand Consultant BearingPoint Inc. denis@garandnet.net www.bearingpoint.com

Presentation Outline What is microinsurance Importance of data Rate components and key determinants Health insurance- additional considerations Modeling techniques Examples Conclusions

What is microinsurance? An important financial service Expect good management practices Properly designed data base Regular review of results Data managed as valuable resource Microinsurance mostly community rated

Importance of Data -Demographics 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

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

Price: Main Components Claims cost Mortality cost- by age, sex, region, etc. Morbidity cost- by age, sex, region, etc. Dropout costs (lapses, surrenders) and reinstatements Risk premium- provision for adverse deviation from expected claims, or PAD Uncertainty premium- if data isn’t credible Profit- Expenses- marketing, administration, claims payment, depreciation, etc. Investment earnings- use to discount expected claims and expenses

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

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

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. “What if” scenarios possible

Rank from easiest to hardest Difficulty in pricing Rank from easiest to hardest Accidental death Life insurance, tied to loan Life insurance, community based Hut insurance Health (prevention, links with medical professionals important) and livestock Crop insurance

Example 1

Example 2 Child health insurance Benefit Rs 2,000 per household Voluntary Hospitalization Claims per family Year 1 Rs 97 Year 2 Rs 85 Year 3 Rs 70 What happened? Percentage of households with insurance increased

Example 3 Health insurance Surgical benefit Voluntary Claims per insured Year 1 Rs 65 Year 2 Rs 95 What happened? Increased communication Large variations by region Monitoring found one hospital had high rate of hysterectomies

Example 4 Creditor Life insurance Claims per insured certificate Year 1 Rs 22 Year 2 Rs 59 What happened? Initially women covered for loans, in second year coverage was added for their husbands.

Conclusions Data is important and should be managed Pricing requires an understanding of the whole plan, management, administration, claims, etc. Periodic monitoring Health insurance requires more skill to price Microinsurance requires good management skill and can lead to success in many other markets