MR Microinsurance_2012_03_29.indd - International Labour ...

Pricing of microinsurance products
21.5 Monitoring and evaluating product experience
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Once the product is ready for launch, it is essential to set up a management
information system (MIS) to collect data on actual claims and expense experience
so that the assumptions, premium, product features and processes can be
improved. This will support the close monitoring of initial assumptions against
actual experience so that necessary pricing adjustments can be made when
appropriate. The data should include demographic details of the insured, claims
submitted and the product’s financials so that key performance indicators (KPIs)
can be computed and further analysis undertaken. The sensitivity/scenario analysis
undertaken in step three of the cycle will highlight which of the KPIs require
monitoring on a regular basis (i.e. those to which the financial viability of the
product is most sensitive). It is very important to continuously monitor claim
patterns and investigate anomalies. This exercise can be supported by an MIS
and an accounting system that is sufficiently robust and well-managed to enable
all administrative processes to be monitored. 5
21.6 Refining the premium
Premiums should be adjusted over time on the basis of sufficient observations.
While mainstream insurance companies usually have large portfolios, with the
take-up for a single product reaching hundreds of thousands, a microinsurance
product may not reach critical mass in its early years, depending on the country
and the distribution channel used. Take-up is often limited at inception of a
scheme, since a major communication effort is required to create awareness and
educate a target segment that is unfamiliar with insurance. Initial low take-up
will have an impact on the following:
– Frequency of claims may vary from period to period, but the intrinsic frequency
that represents an average over several periods may remain the same. Therefore,
this assumption should be based on a long-term expectation and adjusted when
sufficient credible evidence suggests a material change.
– Administration expenses: If the number of policies sold is low, the amount of
fixed expenses allocated amongst these policies will be high. However, in the long
term the fixed expense amount allocated to each policy should decrease as sales
increase. High administrative expenses increase the premium, thus reducing
affordability. Therefore, an average long-term expected expense ratio should be
used from the launch of the product. 6
5 See Wipf and Garand, 2010; and Wipf and Garand, 2006 for more details.
6 The start-up cost should be amortized over a suitable period.