Back to basics

05 August 2004 Angelo Coppola

(01.08.04) Michal Nejthardt, actuarial analyst, Life and Health, at Munich Reinsurance, says there a number of reasons insurers and reinsurers will think twice about pricing a life insurance product targeted at truck drivers.

This occupation is considered high risk because of the added dangers that a truck driver is exposed to.

Not only do they face normal mortality like everybody else, but have an added exposure to death due to the amount of time spend on the road. This risk is much greater than for the average insured population.

Furthermore, considering that deaths on South African roads are much worse than in most other parts of the world, this factor cannot be ignored in pricing products for this market.

AIDS poses another pricing problem. This aspect adds a difficult dimension to the problem of pricing.

Studies have shown that HIV prevalence among truck drivers could be quite high due to the length of time spent away from home and thus their contact with sex workers.

The successful pricing of a life insurance benefit for truck drivers would therefore be to adhere to the fundamental principles of insurance.

Have a large pool of policyholders to spread the risk. This is certainly achievable seeing that there are 7, 2 million registered vehicles, of which 231 thousand are heavy trucks; 1,4 million light trucks; and 106 thousand heavy vehicle trailers.

Obtaining a large volume/pool of such risky business may be difficult for an insurer due to the lack of capital and inherent risks. Luckily this can be easily mitigated through a reinsurance agreement.

The insurer should insure low probability events. AIDS deaths do ignite the mortality risk considerably. HIV testing at inception can reduce the risk, but may compromise the marketability of the product.

The risk should be predictable. This can be achieved by using past data and noting trends, especially for road deaths and AIDS deaths.

The individual risks should be independent. It is unlikely that a number of insured truck drivers will be killed from the same event. This could be a risk if an affinity group of truck drivers is insured, and they regularly work in the same area.

Accumulations can pose a considerable risk of aggregation of claims. Thus ultimate liability should be set for an individual risk and also per event.

In summary then when pricing long-distance truck driver mortality, best results are achieved by splitting out the three major risks affecting their mortality and modelling each separately, normal mortality, added accidental death risk and AIDS mortality.

These results can then be amalgamated, usually through addition, but assumptions about the dependence of the risks can be made.

Certain high risks such as natural deaths, due to AIDS could be excluded, for example by offering an accident only product, or through underwriting.

Experience stability under a truck driver life assurance product is paramount. This can be achieved through pooling large volumes of new business. This can be efficiently done through a quota share agreement.

In the end a healthy dose of pragmatism may be needed to land up with a product that is easily marketable and contains enough margin to yield a suitable return on capital employed.

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