A model to design and price a family protection product with hospital cash rider
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The major objective of this study was to design and price a family protection product with a hospital cash benefit that achieves a profit margin of 10-40%. It incorporates the main life, the spouse and defined or preferred number of children. It pays a maturity benefit and hospital cash time the main life is hospitalized within the term of the policy. Profit testing pricing technique was adopted where various actuarial computations were carried out to determine the premium amount for different terms and ages. Major assumptions made include Interest rate, Expenses, Risk Discount rate, management charges, Hospitalization rate and Surrender rates. The premium result was used to project the possible future cash flows associated with this product to ascertain whether it’s profitability. Results from the above methodology indicate Male lives below 50 years have higher premium rates than female lives of the same category a trend which reverses after 50 years of age. The Product is also observed to be more profitable with female lives at ages below 50 years above which male lives are more profitable. Annual Premiums are seen to be decreasing with increase in product term. Profitability is averagely the same across all terms. With the hospital Cash Rider, Profitability is observed to be higher as compared to without scenario implying the rider adds value to the product. Sensitivity analysis was carried out on the above results to determine major assumptions that greatly impact the profitability of this product. It was observed that the biggest drop in profitability is due to an increase in surrender and discount rates these therefore need to be monitored regularly and repricing done to reflect the actual experience. However, increase in interest rates, drop in expenses are seen to increase profitability.