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: Death Disability Illness or sickness To a Group of people with some common characteristics e.g. Employees of one employer Employees 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 interests Shareholder Interests vs. Marketing needs Innovation of products vs. Administration systems Guarantees vs. Capital required Profits vs. Volumes Marketing Perspective Competitiveness of rates rates to meet required return

CONFLICTS IN PRICING ( Cont.…) Operational Perspective pay Claims security to Policyholders meet expenses- Administration and Fixed Overheads manage 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 = (q x * 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 pricing Profit 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 Accident al deaths Total deaths Year – end number of Employees Average Employees Per Mill’ Accidental Death rate Per Mill’ Total Death Rate ,498 57,582 58,674 58,712 58,877 53,039 56,040 58,128 58,693 58, Non- weighed Total ,343284,

…EXAMPLE CONTINUES If the non-weighed Total Mortality rate is then determined to be suitable q x i.e 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 = 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.