MR Microinsurance_2012_03_29.indd - International Labour ...

Pricing of microinsurance products
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over- pricing. In the absence of more information on the distribution of
healthcare expenses, using only the data shown in Table 21.2 does not enable
conclusions to be drawn on a cover limit that would exclude very risky expensive
profi les, but still cover most health treatment costs for the target segment.
Average and distribution are two diff erent types of data and cannot be used
interchangeably.
Table 21.2 Common errors in deriving health insurance assumptions from scant data
Regional data and cover limit India Bangladesh
Percentage of gross domestic product spent on health health 4.9 3.8
Percentage paid privately privately 75 64
Per capita out-of-pocket out-of-pocket expenses INR 1 540
(US$31)
21.3 Setting assumptions
Tk 487
(US$7)
Th e assumptions underlying a risk premium calculation may seem intricate but
are actually limited to the frequency of the risk events, distribution of claims
costs and characteristics of the insured population. Th e assumptions on which
risk premiums are usually based – maturity of the scheme, controls, size of the
portfolio and diversifi cation of the risk – are often not met. Because of the
dynamic nature of the underlying risks, actual experience will probably be diff erent
from the underlying assumptions. Th e aim of a pricing exercise should
include minimizing frequent and signifi cant adjustments in the risk premiums
presented to the target customers. Th is section suggests areas for consideration
when setting assumptions supporting risk premium calculations so as to avoid
disruptive premium adjustments.
When setting assumptions, the pricing specialist should consider the time
horizon over which the risk premium will be valid and the trends of factors that
aff ect claims frequency and severity. For example, the initial claims frequency for
a health scheme may be low immediately following the launch of the product,
due to poor awareness of the claims procedure. Later, it may rise sharply as
policyholders become better educated in the claims procedures and gain the
confi dence to access health care. In this case, if the assumption is reviewed on the
basis of fi rst observations, the risk premium will not be suffi cient to cover the
actual outlay over time. To achieve sustainability in the medium to long term,
assumptions should include some element of trends in expected experience that
may vary over time.
Th e risks covered by a product sold in a small geographical area may be
correlated. Th e target customers may be exposed to the same risks. For example,