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

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

Product Design Process Demand Analysis Pricing & Evaluation Maintenance & Monitoring

Demand Analysis Pricing & Evaluation Maintenance & Monitoring Customer Oriented ● Protection, Saving, or Investment ● Life, Health, or Property ● Children, Woman/Man, or Elderly  Based on different social values or the economic environment, the customer demand is different.

Demand Analysis Pricing & Evaluation Maintenance & Monitoring Company Oriented ● Market Share & Profitability ● Product Positioning & Market Segmentation ● Marketing Channels and Strategies  Company's strategy is the key factor of product design.

Advanced Thinking: Basic Plan or Rider Which product type (basic plan or rider) is better? Product type Basic planRider Policy TermLong-TermMostly 1-year Premium Higher; Fixed premium and limited period Lower; Variable premium and pay annually Marketing Simple, agent can learn a single sale skills to sell all customers Elasticity, agent need to combine products to meet customer needs Management Complex, need a larger system to manage policies Relatively simple Adjustability It’s hard to adjust for sold policy More easily to adjust benefits or T&C Profit Lower profit marginal Large asset size Higher profit marginal Small asset size

Advanced Thinking: Basic Plan or Rider Medical insurance Benefits Hospitalization Home Health care ICU, BICU In-patient surgical Main challenges Uncertain incidence rate Faulty Terms and Conditions Unknown abuse cases Regional differences 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.

Advanced Thinking: Basic Plan or Rider Female insurance Benefits Death/TPD Additional Death/TPD Maturity Benefit Spouse Additional Death/TPD Full moon benefit Feminine Medical Main challenges Brand differentiation Agent training Easier to sell Uncertain incidence rate Faulty Terms and Conditions Unknown abuse cases 1.Empirically, women has lower payment ratio and combined medical insurance with other benefits can reduce the medical risk. 2.We need a simple way to training agents. “Simple, Easy to sell” is more important.  Basic plan is better.

Pricing & Evaluation Demand Analysis Pricing & Evaluation Maintenance & Monitoring Interest rate Mortality Incidence Collect information Premium Surrender Reserve Actuarial calculation Expense Profit Evaluation

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

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 $1.1 2 = $1.21 in 2-years  Future value is $ = $2.59 in 10-years Years FV of $1

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

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 $1/1.1 2 = $0.83  $1 in 10-years, present value is $1/ = $0.39 Years PV of $1

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

Mortality Rate Age (x)MaleFemale %0.188% %0.084% %0.080% %0.078% %0.077% ……… %53.724% %74.396% 99100% 1980 CSO (Q x ) Age (x)SurvivalDeath Expected payment 351,000,0002,170217, ,8302,315231, ,5152,479247, ,0362,661266, ,3752,872287,209 …987,5033,111311, ,8492,623262, ,2261,659165, ,725 Expected Payment Male, 35-years old 100 Million Whole Life # Assume 1 million people survival in the beginning. number of death = number of survival * Q x Expect payment = Death benefit * number of death

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

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

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

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

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

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

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

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

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

Maintenance & Monitoring Demand Analysis Pricing & Evaluation Maintenance & Monitoring Premium Income PFYP Quantity of policy Persistence Rate Payment Ratio Quality of policy Investment yield Operating expenses Financial report Improve the Product Design

Agent Productivities Job title ItemsTarget HO HCMHNDNCTDNAIHP EAS  Active ratio (%) Productivity (M) SAS Active ratio (%) Productivity (M) IA Active ratio (%) Productivity (M)  The active ratio and productivity is not good!

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

Simple Success Process for Agent High Activity Build Customer Network Long-Term Wealth Source

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