Design of a pricing model of a money-back endowment plan

Abstract

This research study was done to show how money-back endowment plans are priced while taking into account internal rate of return to the policyholder at maturity. The researcher also wanted to attain a positive profit margin of 6% for the side of the life insurance company at an internal rate of return of 4% to a policyholder all at maturity and finally the researcher saw the need to design a resilient product that is immune to slight changes in the economic conditions. For good results to be achieved, assumptions were made which were; Mortality was based on KE 07-10 life tables, interest rate was 19.212%, risk discount rate was 18.174%, simple reversionary bonus rate was 2%, initial expenses were 15%, renewal expenses were 5%, initial commission was 45%, renewal commission was 15%, the withdrawal rate for the first year was 35% and the withdrawal rate for years two to four was 25%, the withdrawal rate for years five up to the one before the last year was 5% and that of the last year was 0%. The research was quantitative in nature. This is clearly shown in the methodology i.e., in the pricing model where formulae for modelling is clearly laid out for example formulae for dependent probabilities, prospective reserves and profit margin. The results show that the overall profit margins for males lies within a range of 1% to 8% while that of females lies within a range of 0% to 8%. Furthermore, the overall premium rates for males lies within a range of 2% to 16% while that of females lies within a range of 2% and 12%.