Chapter 15 Flashcards
Question 15.4
In Actuaria, where you live and work, children attend schools in the area in which they live. You are developing a health cash policy covering optical care up to a maximum of R1 000 p.a. per child to be sold to parents of children attending primary school in a particular area. A single premium is paid for cover of term 7 years (corresponding to the expected duration of primary school).
i) Describe how the policy would be priced and the likely structure of the premiums. (3)
The insurer would like to offer parents the option to extend cover beyond the original term for 5 years (corresponding to the expected duration of secondary school).
ii) Discuss how you would price such an option and how it could be structured to reduce the cost.
[]
Questions and Answers Bank
Solution to Question 15.4 i) Pricing the product
The insurer needs to source data for optical claims for children of primary school age relating to the socio-economic group of the school district.
The schools may be able to provide some information (although there may be issues of confidentiality and privacy). The insurer may also use population data, industry sources, or data from a similar product. A possible risk factor is family history of sight problems. The insurer would calculate expected claims from the data. It would then add loadings for expenses and profit and a margin for contingencies.
Ideally, a simple premium structure would be used, although a tiered premium structure may be used if more than one child is covered.
(Maximum 3)
ii) Pricing the option Parents of children with sight problems will find the cover more attractive, and so will be more likely to exercise the option. It will therefore be necessary to use ultimate (or loaded) experience to price the cover.
There is unlikely to be sufficient data to use the North American method, so the conventional method may be used instead.
The conventional method assumes:
l All lives eligible to take up the option will do so, and this will be at a standard rate. l The claims experience of those who take up the option will be the Ultimate experience that corresponds to the Select experience that would have been used as a basis if underwriting had been completed when the option was exercised.
However, with actual claims experience being worse than this, the difference represents the cost of the option.
The insurer is exposed to the risk that average claims increase due to the availability of costly innovations in treatment procedures.
The insurer may list the procedures covered under the current policy and specify that only these procedures will be covered under the extended cover option.
The insurer is exposed to the risk as there is an epidemic affecting the sight of school children in the school district, resulting in more policyholders extending cover and higher claims than expected.
The insurer may want to exclude claims resulting from an epidemic either from the whole policy or from the extended cover option.
(
Question 15.5 A healthcare insurance company sells a large volume of non-linked individual critical illness policies, on guaranteed terms, through insurance intermediaries. List the items that would be used in a cashflow profit test to price this. [5]
Solution to Question 15.5 l Premiums l Benefit payments l Claim incidence rates l Mortality rates l Lapse rates l Expenses l Expense inflation l Commission l Investment return l Tax l Mix of new business where there are cross-subsidies (e.g. by policy size) l New business volumes (for determining the expense loading) l Profit criterion l Risk discount rate l Reserving basis l Required solvency capital.
(1⁄2 each, Maximum 5)
