Design of a Model to Price an Endowment Assurance Product
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The purpose of this project was to design and price an endowment assurance product that pays benefits on maturity, provides protection in case of death during the policy term, a 5-year annual income benefit after maturity of the policy and annual in-patient health cover during the policy term. The key assumptions made include; - risk discount rate of 9% per annum, interest rate of 7% per annum, surrender rate of 15% per annum, in-patient sickness rate of 10% and KE 07-10 mortality table among others. The research was quantitative in nature involving the manipulation of pre-existing data using profit testing pricing approach, use of assumptions and bases from various sources. For example, interest rates and risk discount rates determined from the Bank of Uganda 10-year Treasury bond as at April 2019, In-patient admission rate for 2014 Uganda Hospitals and Health center IV Census Survey. From the output of the model, a typical 35-year old male who pays monthly premium of UGX 86,056 for a 10-year policy term attains benefits of UGX 10,000,000 paid to his/her beneficiaries on death or UGX 10,000,000 on maturity with annual in-patient cover of UGX 2,500,000 and annual maturity income benefits of UGX 250,000. Observing from the results of sensitivity analysis, slight variations in interest rates and risk discount rates cause a huge variation in the profit margin; therefore, the factors were selected with great precision and accuracy while pricing the product. In addition, while selling the product, proper mix of gender and age is mandatory to ensure profitability.
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