A Design of a Pricing Model of a Single Premium-Annuity Product

Abstract

The report contains a design of a model of a single-premium annuity product. The product provides annual annuities, hospital cash, and survivors benefit incase death occurs in the first 16 years after contract inception, for an exchange of a lump-sum premium. It is designed for both Males and females aged between 55 to 60 years. The product aims at protecting pensioners against longevity risk and investment risk, not only that but also guarantying annual payments during their golden old age. The annuity product model providing benefits as annual annuities, hospital cash, and survivors’ attains the above objectives. Note; if death occurs 16years after policy inception, no survivors’ benefit is to be unveiled. The policy has no cash value (no reimbursement in case of policy cancellation) The researcher solved the investment risk problem by taking an assumption that the company shall provide a guaranteed investment yield rate which based on the yield rate of Government treasury bonds. The annual annuities increase with an increase of the entry age i.e. a 60years old individual is entitled to higher annuities compared to their 59 years old counterparts irrespective of their gender. That is not the case for other benefits. The product is easy to market as it is cheap, affordable and with slightly an extra benefit (hospital cash) compared to those on the market. This makes it competitive too. According to sensitivity analysis results appendices table 1; interest rate, inflation rate, and management charge rate are the most sensitive assumptions. Therefore, the researcher should select these assumptions with the highest degree of precision and accuracy while re-pricing the product. The law of large numbers is applicable so as to attain the presumed profitability margin. While enacting various policies in action, a proper mix of age and gender should be ensured for profitability reasons of the product. For a scenario glimpse of results generated by the model, please turn to appendices tables 2-5. The model generates an acceptable profitability margin range of 8.19% - 5.0