Designing a Pricing Model for a Special Term Assurance Product

Abstract

This Term Assurance Product was specifically designed to pay out a lump sum, if the policyholder dies during the policy term and a maturity benefit as a return of a proportion of premium on survival of the policy term. The profit testing approach adopted in this product’s design and development was the Conventional style approach. The primary assumptions taken are mortality (KE 2007-2010 Mortality tables), interest rate of 8.5% per annum, risk discount rate of 8.55% per annum and maturity rate of 75%. Various sources were utilized to come up with model assumptions, that is; Bank of Uganda 10-year Treasury bond as at April 2019 to come up with model assumptions like the interest rate and risk discount rates, using the IRA website to come up with the expense rates and using KE 2007-2010 Mortality tables as a basis for mortality. Primary assumptions of interest rate, risk discount rate and maturity rate were chosen with excellent accuracy while pricing and designing the product since small changes in these assumptions triggers an enormous variation in the profit margin as observed from the outcomes of the sensitivity analysis. Besides, there must be a correct combination of age, gender and policy terms in order to ensure excellent profitability. From the model’s output, a 35-year old male with a 10-year policy term paying an annual premium of UGX 141,822 acquires a lump sum benefit of UGX 25,000,000, which is paid to his family or dependents when he dies within the term of the policy and a maturity benefit of UGX 1,063,664.917 when he survives the term.