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Insurers rely more on external data for risk & pricing

Bhavna Verma, Appointed Actuary at IndiaFirst Life Insurance, reveals the new approaches in designing insurance products:

Insurers rely more on external data for risk & pricing

Ravi Lalwani: What new types of data are you using in formulating products?

Bhavna Verma: Life insurance product pricing requires future estimates of several operating variables such as mortality experience and policyholder behavior, and external variables such as interest rate environment. Typically, assessment of these parameters involves a combination of external data sources, the company’s own credible experience adjusted for expected future experience, and professional judgment. Once a product is priced, the actual emerging experience is continuously monitored and fed back into subsequent pricing. This is termed the Actuarial Control Cycle.

More external data is increasingly being used in risk management in insurance companies which has a ripple effect on pricing. For example, data on credit scores could be used in fraud prediction models and pooled industry data is used in claim investigations.

What are the sources of these data types? What is their reliability?

Industry data sources such as the assured lives mortality table are prepared by the Institute of Actuaries of India after detailed investigations and using a structured methodology are adopted universally by all insurance companies. Adjustments to reflect the company’s historical experience in the targeted customer segment and channel are however necessary. In the case of life insurance, the company’s databank of experience is the richest source of data to appropriately reflect the risk in the business and/or gain a competitive edge.

How do you assess the emerging needs of customers?

On an annual basis, we conduct market research to understand the customers and their evolving needs. Interactions with customers and distributors give insights into the product structures or features that could add value to customers. The overall attempt of the company has always been to proactively produce feature-rich products with variants and options which add significant additional value to the customer at a limited incremental cost.

In bundling and unbundling different types of risks, what factors do you consider?

Traditional life insurance products are bundled products where the pricing of individual parameters determines the final product outcome. The assumptions used will generally influence the correlation between various parameters based on best judgment. For example, a product likely to be sold to an exclusive high-ticket segment for a dedicated distribution channel could have an expectation of future experience of claims and future premium payments different from other products as evidenced by experience.

Riders are frequently built into product structures with appropriate risk pricing to address customer needs. Examples are inbuilt waiver of premium rider which covers for payment of full contractual premiums even after the death of primary life assured.

What changes are you seeing in re-insurance that have an impact on designing insurance products?

Reinsurance is typically an enabler for new product designs where the company may not have relevant data available at the individual or even industry level. This is relevant in the Indian industry which is younger than many other markets, and such engagement with reinsurers continues. Term products across the industry have seen rate increases basis reinsurer rate increases in the last 2-3 years, partly driven by the covid experience. The reinsurers’ underwriting requirements have also undergone changes which are adopted by the company in new product design.

What new customer segments would the company be targeting in the next 1-3 years?

As an aspiration, the company aspires to provide insurance coverage to all of India, which includes various customer segments and there is room to increase penetration everywhere. This year, the company has increased its focus on the retirement savings segment through a focused deferred annuity product this year. Direct sales will help penetrate the younger or millennial segment. Higher cover for working women and women, in general, is certainly needed, and another segment we are evaluating.
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