A model for pricing and profit testing of a conventional credit insurance for individuals

Abstract

This project’s objective was to design a conventional credit insurance product for individuals that get loans in Uganda, which pays the individual’s outstanding loan amount upon death or permanent disability. Individuals that acquire loans, especially large loan amounts, face challenges of paying the loans especially in the event of permanent disability or death as it leads to financial burden transferred to family members or even loss of assets given in as collateral. The policy modelled has two decrements; death and disability. Assumptions have been made to aid in pricing and profit testing the model. The profit margins over different ages and policy terms have been computed and the principle of equivalence has been used to calculate the premiums. Python 3.13.9 and Microsoft Excel were utilized to build the pricing and profit testing models. Results show that the ideal terms for the policy are three to six years, covering both male and female lives between ages of 25 and 60. Premiums tend to increase with age and profit margins tend to decrease with policy terms. This product is priced to ensure premiums are affordable for low-income earners so as to promote inclusivity and consequently promote poverty alleviation. Additionally, sensitivity analysis was carried out to determine the effect of changes in certain assumptions on the profit margin. The results, show that the interest rate, mortality, expenses and commission affect the profit margin. A key challenge for this product is distribution to the customers and way of paying premiums in the most economical way. I suggest that insurance companies work with SACCOs and banks to distribute the product to customers and also use mobile money services to pay premiums.