A pricing and profit testing model for ‘CertiQuest-life: a unit-linked insurance plan.

Abstract

This dissertation report gives details about a pricing and profit testing model for a unit-linked life assurance policy. The unit linked endowment product has been named CertiQuest-Life and seeks to provide a life cover to young professionals aged twenty to forty years, with the added benefit of an investments option from which they can get money to cater for expenses incurred in their pursuit for professional certification. The pricing model determines the appropriate premiums that would be paid by each eligible individual basing on certain factors. The distinguishing factors considered for this model were mainly age and sex. Actuarial techniques were used to compute the premiums by balancing the equation of value at zero, thus determining the appropriate premium to be charged for that specific individual. The profit testing process involved determining the profit margin and was done in Microsoft Excel for a twenty-year-old female and a twenty-year-old male after which the generalization of the model was done in Python to be able to generate results for various ages over various terms. Analysis was done in Microsoft Excel to understand the relationship of premiums and profits for the various ages over all the terms. From the results, the profit margins ranged from 4.29% to 5.47%, and the premiums ranged from 433,012 to 1,322,989 Ugandan shillings over all the terms and ages. Overall, the policy was seen to be more profitable when sold to females though on average premiums paid by males were slightly higher. The policy in general was more profitable for shorter terms, and when offered to younger males but age didn’t seem to have a direct relationship with profitability for the females. The sensitivity analysis showed that the product was generally resilient to changes in specific variables, with changes in inflation rate having close to no effect on the profit margin. However, changes in expenses, commissions, and the risk discount rate had a negative relationship to and strongly affected the profit margin. Therefore, for the insurance provider it would be best to market the product extensively to young female professionals. For the prospective policy holder purchasing a longer-term policy would ensure greater returns to cover more expensive professional courses, while those opting for shorter terms would be best served if they were aiming to pay for cheaper courses.