A Design of a Pricing Model for an Endowment Assurance Product with both Critical Illness and Disability Riders Incorporated in it.
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The major objective of this study was to design and price a product which pays out a sum assured on the event of death of the policy holder with in the term to the specified beneficiaries, or a maturity benefit to the policy holder and in addition pays out a lump sum on first diagnosis of a noted critical illness to the policy holder or on accidental permanent disability/impairment of the policy holder with in the term. This product caters for adults in the age range of 18 to 60 who are either low income earners or middle income earners or high income earners as many of them are un-insured yet surely can benefit from this product. The sum assured considered in this product is either UGX 10,000,000 or UGX 20,000,000 or UGX 30,000,000 or UGX 40,000,000 or UGX 50,000,000 or UGX 100,000,000. View appendices to see annual premium rates for all ages and terms. The profit testing pricing technique was used to determine whether the premium amounts for different ages, genders and terms would lead to the desired profitable future cash flows to the insurer. The profit margin desired was in the range 5-20%. The key assumptions made include; interest rate, expenses, risk discount rate, mortality rates and surrender rates. From the results in the model, it is observed that typically, a 30 year old female with a 5 year term policy who pays a monthly premium of UGX 1,049,503.44 gets a sum assured of UGX 50,000,000 on maturity or on event of death and in addition receives a lump sum of UGX 7,500,000 either on first diagnosis of a noted, specified critical illness or on permanent accidental disability/ impairment of this policy holder with in the term. Sensitivity analysis was done to find out how a change in the assumption values affects the profitability of the insurer and also the premium rates according to this product and it was found out that the most sensitive assumptions that should be carefully considered and can easily cause substantial loss to the insurer are: interest rate, risk discount rate, and expenses. According to this product, profitability in males is generally higher than that of females for most ages except 25, 35-45, where profitability in males is observed to be lower as compared to females. This is due to higher mortality at those ages and higher mortality reduces profitability. Profitability is highest for a term of 15 years and lowest for a term of 6 years. There is also generally less premium paid with increase in term to maturity compared to the benefits. This therefore calls for a mixture of gender, terms and ages to eliminate their effect on profitability. See other recommendations in chapter 5.