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Category Life Insurance

Can South Africa move to preferred risk?

18 February 2009 Gareth Stokes

Jaqui Liebenberg, group business development actuary at RGA says “competition in the insurance industry is largely defined by a product’s features, value-added service and price.” To keep ahead of the game insurers have to ensure that “their rates are marketable” without compromising the underlying risk pool. Liebenberg notes that one way to do this is to offer better rates to low-risk lives. And that requires a smarter approach to risk ratings.

What can insurers do to further differentiate their risk pools? On Tuesday 17 February 2009, FAnews Online attended an RGA Reinsurance Company of South Africa (RGA) technical seminar on improved risk rating to discover more.

The basics of risk rating

Liebenberg says risk rating requires “lives [to be] subdivided into separate categories by factors such as age, gender, smoker and socio-economic status.” She says South Africa is perhaps the only country in the world to use socio-economic status as a rating factor – something made possible by “the huge income inequality that exists in the country.” By now most FAnews Online readers understand how insurance companies price their policies. They rate each new policy application using a number of criteria before assigning the insured to an appropriate risk pool or declining the business.

Once the risk is ‘rated’ the insurance company will typically determine the premium rate after by assessing mortalities for its ‘standard’ life – perhaps applying a similar premium across 60% to 140% of the risk pool. Lisa Wells, chief pricing actuary at RGA says the appropriate premium is set after an assessment of mortality from Accidental and Natural causes. In South Africa the Natural deaths category is analysed further to include Non-Aids and Aids events. Insurers already maintain separate pools for Non-Smokers and Smokers.

Wells notes that the trend in international risk pooling is to create preferred risk classes. This trend developed due to the extensive underwriting requirements to implement a two-year non-contestability clause in the North American market. Insurance policies cannot be contested on any basis once the insured has paid premium for more than two years. Underwriters in North America and Europe now use a number of additional rating factors with the result that 90% of new policies are preferred products. The Society of Actuaries (SOA) has identified a number of international ‘preferred’ criteria, which include Cholesterol, Blood Pressure, Build & Body Mass Index, Family History, Time since last tobacco use, Driving records and Personal Medical History. But preferred products can be created in existing risk pools too.

Understanding the difference – risk versus preferred risk

Wells says that the Non-Smokers pool can easily be separated into two preferred classes and one residual class across the standard risk group. Individuals in each class can then be charged an applicable premium to prevent excessive cross subsidisation of risk. South Africa’s risk pools have evolved over a number of years. We moved from unisex pools, to male/female pools and now distinguish between smokers and non-smokers. But going forward there is a need to create additional preferred pools to further differentiate the market.

According to Liebenberg preferred risk rating involves splitting the standard and sub-standard lives into additional sub-classes based on health risks. So – for example – a standard life could be “extremely healthy, healthy or borderline healthy.” And that means insurers have to “identify risk factors that can be used to better rate risks and reduce cross-subsidies between the healthier and the less healthy standard population.” Preferred risk products offer a number of benefits to stakeholders in the insurance industry. Healthier insurance consumers will achieve real savings while insurers will be able to concentrate on cost effective product solutions. Preferred products create new avenues for marketing departments and would hopefully raise consumer awareness on a number of health issues.

South Africa has the opportunity to gather additional information from its current selection processes. Routine blood tests for HIV/Aids could be tested “for additional risk factors such as cholesterol” at minimum additional cost. There is also an argument to pay closer attention to the information farming completed during the life insurance application process. Improved questions will lead to more complete disclosure and ultimately to better assessment of risk.

Editor’s thoughts:
Risk rating is great if you meet the requirements to swim in the ‘standard life’ pool. But stringent additional rating factors could have severe consequences for the so-called outliers. Where would you draw the line in your quest for the ultimate risk pool? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Andre, 18 Feb 2009
It seems to me that this is another "inovative" way of making huge profits in an dwindeling industry
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