A model to design and price an endowment assurance product with hospital cash and retrenchment riders
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The main objective of this research project was to design and price an endowment assurance product which offers retrenchment and hospital cash riders upon occurrence of a contingent event whilst achieving a profit margin of at least 5% for the insurers. The profit testing pricing technique was adopted using both MS Excel and Python software to do actuarial computations so as to yield the premium amounts payable for different terms and ages and projected profit margins to be realised by the insurer if this product is sold. The key assumptions based on while designing the product include; interest rate, risk discount rate, expenses, Kenyan mortality and critical illness rates, South Asia Labour retrenchment probabilities and the guaranteed sum assured. From the model, for example, a typical 26 year old male non-smoker with a policy term of 10 years would be required to pay an annual premium of UGX 1,613,490 to guarantee death, surrender, retrenchment, hospital cash and maturity payout while bringing in a profit margin of 6.21 % to the insurers. Results from the above methodology indicate that older people would be required to pay higher premiums than younger individuals. It was also established that the longer the term, the lower the premium payable. The Product is observed to be more profitable with an increase in the policy term and for a lower age at policy inception of the individual. The profit margins of females were higher than for males. Profitability is does not vary greatly for policy terms greater than 6 years. A sensitivity analysis of the product was carried by varying the interest rate, risk discount rate, mortality rates, retrenchment rates, surrender rates and expenses. It was established that a variation in the risk discount rate and interest rate had a more significant impact on the profit margin with the risk discount rate being the most significant.