P U B L I C S E R V I C E S Workshop on Microinsurance Insurance and Regulatory Development (IRDA) Institute of Insurance and Risk Management (IIRM) United States Agency for International Development (USAID) Hyderabad 14 & 15 October 2005 Pricing Microinsurance Products Examples Denis Garand Consultant BearingPoint Inc. Indian Insurance Reform Project

P U B L I C S E R V I C E S Page 1 Presentation Outline Summary of key pricing components Insurance principals Order of difficulty in pricing Life insurance example Health example 1 Health example 2 Health example 3

P U B L I C S E R V I C E S Page 2 Premium calculation 1. Expected claims 2. Administrative expenses 3. Profit

P U B L I C S E R V I C E S Page 3 Insurance principals Large number of similar units exposed to the risk E.g. Probability of death 1 per thousand, 1 person ─ 10,000 people, similar risk Limited policyholder control over the insured event E.g. Health insurance ─ hospitalization cannot be planned Existence of insurable interest E.g You must suffer a lost; insuring ─ neighbors livestock? Losses are determinable and measurable E.g. Hut insurance ─ must be able to determine value of hut Losses should not be catastrophic E.g. Kutch Earthquake ─ Requires reinsurance Chance of loss is calculable Premiums are economically affordable

P U B L I C S E R V I C E S Page 4 Difficulty in pricing Rank from easiest to hardest Accidental death Life insurance, tied to loan Life insurance, community based Hut insurance Health and livestock (prevention, links with medical professionals important) Crop insurance

P U B L I C S E R V I C E S Page 5 Life expected claims

P U B L I C S E R V I C E S Page 6 Life plan design Plan design Rs 5,000 life insurance Community rate Voluntary participation Scenario 110,000 women age 27 Expected claims(5*2.96*10,000)/(10,000) = Rs 14.8 per insured Scenario 25,000 women age 27 ; 5,000 men age 32 Expected claims(5*2.96*5,000 +5*4.53*5,000)/(10,000) = Rs 18.7 per insured

P U B L I C S E R V I C E S Page 7 Life: History of one MI

P U B L I C S E R V I C E S Page 8 Health: Example 1 Child health insuranceBenefit Rs 2,000 per household Voluntary Hospitalization Expected claims Year 1Rs 97 Year 2Rs 85 Year 3Rs 70 What happened? Percentage of households with insurance increased

P U B L I C S E R V I C E S Page 9 Health: Example 2 Health insuranceSurgical benefit Voluntary Expected claims Year 1Rs 65 Year 2Rs 95 What happened? Insured issued a photo ID Large variations by region Monitoring found one hospital had high rate of hysterectomies

P U B L I C S E R V I C E S Page 10 Health: Example 3 Health insurancePrimary care, hospitalization Voluntary AttributesStrong community participation Reduction in hospitalization rates Health promotion strategy Viable

P U B L I C S E R V I C E S Page 11 Conclusions Understand the demographics of the group Understand how the plan is managed Know the targeted populations Manage data and monitor