Pricing Group Life Assurance Benefits Issues and Considerations, by Ezweni Tshuma

01 02 03 04 Contents aa Introduction Group Life Assurance Pricing issues Pricing GLA Define Group Life Assurance as a product Benefits covered Pricing issues in general Calculating annual premium for the scheme Definition Benefits covered Stakeholder interests Striking the balance • Formula for annual premium • Dealing with competitive issues

Introduction What is GLA and what is covered? Pricing issues in general Calculating annual premium for a scheme

What is GLA? Group Life Assurance is a simple way of providing Life Assurance cover to a group of people sharing common characteristics, for example: Employees of one employer Employees of a group of companies, Trade union members, members of a society Members of a professional body 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 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

Benefits covered under GLA The following could potentially be covered under GLA: Death Funeral cover including extended family Capital disability PHI Dread Disease

Pricing issues Shareholder Issues Policyholder Issues Life Offices Issues General Issues

Cash flows and the resulting conflicts

Profits (Shareholder) vs. Volumes (Marketing) Conflict of interests Profits (Shareholder) vs. Volumes (Marketing) rates to be competitive, rates to meet required return, Innovation of products vs. Administration systems, System capabilities can limit what business development brains can do. Operational Perspective pay Claims security to Policyholders meet expenses- Administration and Fixed Overheads manage Cash flows

Striking a balance between different conflicts. Premium; profit targets competitive offer good value for policyholders meet regulatory requirements.

Pricing of GLA Premium = Expected cost of claims + commission+ administration expenses +taxes + profit. Expected cost of claims = sum assured x probability of dying within a year. Probability of dying within a year = Probability of a claim = Mortality rate. Commission is fixed in each market, e.g 10%. Administration expenses are specific to a company or size of scheme. Taxes include premium tax or VAT on commission or both Profit margin is specified by the company

Application of loadings Most companies use: for example loading for commission Premium = Expected cost of claims x (1+ commission rate) I prefer Premium = Expected cost of claims / (1- commission rate)

Application of Discounts Competition may force you to offer discounts, The premium charged to the client can be discounted at your own discretion. The discount should not exceed the sum of: Administration expenses, and Profit loading

Interesting remarks Setting a Group Life Assurance rate is more complex than meets the eye, You should consider all the stakeholders and ensure that YOU manage the conflicting interests, You should be able to determine the expected mortality experience that represents the Group, Appropriate margins and loadings to meet required profit margins should be set, Never over discount the premium to retain a scheme for the sake of retaining it, and There is need to continuously monitor and review appropriateness of the rates.

QUESTIONS