Design of a Model to Price an Endowment Assurance Product

Abstract

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.