Designing a pricing model for an endowment life insurance product with a cashback benefit rider for the Ugandan market.
Osire, Keith Thomas
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This study’s aim was to design a pricing model for an endowment life insurance product that pays out a lump sum on death of the policyholder within the term and a maturity benefit on survival of the policyholder to the end of the policy term. The product also includes a cashback benefit rider that offers the policyholder 10% of the total annual premiums paid for every five years the policy is in force. Some of the key assumptions used include; interest rate of 8.5% per annum determined from the Bank of Uganda rate on a 10-year Treasury Bond as of April 2019, risk discount rate of 8.5% per annum determined from the Bank of Uganda rate on a 10-year Treasury Bond and the KE 2007 – 2010 mortality tables. According to the model, a 35-year old male with a 10-year policy term pays monthly premiums of UGX 113,138 for a sum assured of UGX 15,000,000 payable as a death benefit to his beneficiaries on death during the term of the policy or as a maturity benefit on survival to the end of the policy term. Profit testing shows that the product offers higher profit margin for female lives for ages below 45-years after which male lives offer a higher profit margin. The product is also more profitable for policy terms between 10-15 years. Furthermore, sensitivity analysis shows how sensitive assumptions like the interest rate and risk discount rate are to any slight changes and therefore great accuracy is required where they are concerned. In conclusion, a mixture of different policy terms, ages and genders should be considered to stabilize the overall profitability of the product. Sensitive assumptions like the interest rate must be constantly monitored to ensure they match the assumed rates and repricing carried out in case of any deviations.