A model to design and price a unit linked micro insurance plan for small scale/start-up businesses

Abstract

The entire project was based upon pricing and profit testing a micro insurance product for small scale businesses in Uganda. It is a Unit linked product that seeks to provide a life cover to small shop vendors aged 20 to 60 years, with an additional benefit of investment option from which they can generate income to cater for their family needs. Pricing techniques were adopted to determine the appropriate premium amounts for different terms and ages. The key assumptions for this model were surrender rates, expenses, management charges and interest rate. Actuarial computations were used to arrive at the correct premium by balancing the equation of value at zero. Profit margin was determined using profit testing process. This was done in Micro soft Excel for a 20-year-old male and female life, then generalization of the model was done in Python to generate results for various ages and terms. From the analysis, profit margin ranged from (0.35% to 3.49%). Profitability is observed highest during the third and fourth term of the policy for both males and females. It’s also observed that the product is slightly more profitable for young female lives between 20 and 35 years of age. The average premium is slightly higher in young females than males. From the sensitivity analysis, changes in expenses, allocation rate and management charge had significant effect on profit margin. However, changes in surrender rate has little effect on the profitability of the product. A mixture of gender, ages and terms were considered to eliminate their effect on profit margin. Additionally, more actuarial techniques were adopted for example zeroising negative cash flows to avoid any chance of future loss.