Pricing a post-retirement medical insurance product
Ndubai, Jackline Mwendwa
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Privately purchased medical insurance is very expensive for retirees. In Kenya, some companies even put an age cap restricting on insurance. A post-retirement medical insurance product helps in planning for medical expenses after retirement and ensures that such expensive costs are avoided. This paper reports on the pricing procedure undertaken for the new upcoming product as well as the sensitivity of the profit margin to the various variables used in the model. Profit testing of the product was run on one of the insurance companies in Kenya. The pure premium method is used to obtain a premium based on claims experience, instead of guessing a reasonable premium' to be used in the profit testing model. Data was obtained from an insurance company and constituted of their medical claims experience as well as their loss ratios over 2013-16. Premiums were calculated and a mispricing established in a case where profit testing was not incorporated. The study also revealed that the fund charge, inflation and the investment rate were significant in the pricing process and had a significant impact on the profit margin. Every insurance company's goal is to make profit. Hence, even if the company strives to make post-retirement health-care affordable, the company should ensure that the pricing model constructed results in a reasonably profitable premium. The incorporation of profit testing reduces the likelihood of a mis-pricing scenario. Furthermore, it is important that the inflation rate, investment rate and fund charge actual values are as close to the expected values as is possible.