Sustainable Pricing Strategies for Group Risk Business Jenny Gibson & Danny Shuttleworth © 2015 AIA Australia Ltd This presentation has been prepared for the Actuaries Institute 2015 Actuaries Summit. The Institute Council wishes it to be understood that opinions put forward herein are not necessarily those of the Institute and the Council is not responsible for those opinions.

Out of scope  Product terms  Member awareness  Lawyer activity  Data quality  Pricing resources

Agenda Insurance Cycles How to Manage Insurance Cycles Behavioural Economics How to Manage Behavioural Biases

The Insurance Cycle

Price/Profitability

An insurance cycle is the tendency for premium rates, profits and capacity to rise and fall in a cyclical nature over time Hard

Hard

Hard

Time Soft

Soft

Soft

The Insurance Cycle

HARD

Increased Profitability

Increased Prices Tighter Terms

Increased Capacity Increased Competition

HARDENING

SOFTENING

Reducing Capacity Reducing Competition

Reduced Prices Weaker Terms

Reduced Profitability SOFT

Return on Equity 70.0% 60.0%

Investment linked

40.0% 30.0%

Noninvestment linked

20.0% 10.0%

Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014 APRA Insights Bulletins 1998-2008

Jun-14

Jun-13

Jun-12

Jun-11

Jun-10

Jun-09

Jun-08

Jun-07

Jun-06

Jun-05

Jun-04

Jun-03

Jun-02

Jun-01

Jun-00

Jun-99

0.0% Jun-98

ROE

50.0%

Profit margin - Group Lump Sum 20% 15%

5%

-10%

-15% -20% -25%

Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

-5%

Dec-08

0% Jun-08

Profit Margin

10%

Profit margin - Group Disability Income 35%

15%

-15%

-25%

Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014

Dec-14

Jun-14

Dec-13

Jun-13

Dec-12

Jun-12

Dec-11

Jun-11

Dec-10

Jun-10

Dec-09

Jun-09

-5%

Dec-08

5% Jun-08

Profit Margin

25%

Factors that contribute to the Cycle Accounting year basis Market is inefficient Information delays Decision delays Implementation delays

Strategies to Manage Insurance Cycles

Price/Profitability

Strategies to Manage Insurance Cycles

Time

Strategies to Manage Insurance Cycles     

Recognise where you are in the cycle Don’t follow the herd Maintain sound pricing discipline Sustainable product design Product and service differentiation

Strategies to Manage Insurance Cycles  Earlier recognition of emerging experience

   

Reward returns not volumes Revise business plans and targets Effective relationship management ERM controls

ERM Controls     

Checklist of risks Systematic risk assessment Objective risk assessment Is it within risk appetite? Apply appropriate contingency margins or discounts

Market Behaviour and Behavioural Economics

Types of Behavioural Biases  Group or herd behaviour  Competitive reaction  Anchoring bias  Confirmation bias  Overconfidence bias  Loss Aversion / Prudence bias

Competitive Reaction  Fear of the loss of market share  Greed to gain more market share

Anchoring Bias Question Is the population of Turkey greater than 30 million? Is the population of Turkey greater than 100 million? Answer: 77 million

AIA 48 million 107 million

Anchoring Bias Question AIA Is the number of doctors in 500,000 India greater than 200,000? Is the number of doctors in 2,590,000 India greater than 1,000,000? Answer: 840,000

Anchoring Bias Three types of anchoring  Anchoring to a past event or trend  Anchoring to another person’s initial estimates  Status quo

Lets Play a Game

2, 4, 6, …

Confirmation Bias The tendency to seek out evidence to support a point of view and to dismiss evidence that does not support it

Over Confidence Bias The tendency to be over confident in our estimates

Prudence Bias The tendency to be overly cautious in our estimates

Strategies to Manage Behavioural Biases

Strategies to Manage Behavioural Biases Anchoring Bias  Independent review of pricing  Try different starting points, options, approaches and models  Don’t act as anchor to the people around you

Strategies to Manage Behavioural Biases Over Confident / Confirmation Bias  Have you considered all alternatives?  Build your own counter arguments  Get someone else to play “devil’s advocate”  If asking advice of others, don’t ask leading questions

Strategies to Manage Behavioural Biases Prudence Bias  Best Estimates vs Conservative Estimates  Be clear on what extra margins are applied  Consider correlation of risks

Strategies to Manage Behavioural Biases Some other points  Be aware!  Create processes and checklists to overcome bias

References Qin, J., Smee A. and Wallace C., 2005, “The Insurance Cycle and Market Behaviour”, Institute of Actuaries of Australia, XVth General Insurance Seminar Chidgey, K., Cohen, A., Priest, C. and Stephan, K, 2005, “An investigation into the Australian Insurance Cycle”, Institute of Actuaries of Australia, XVth General Insurance Seminar

Feldblum, S.,2000, “Insurance Cycles and Business Strategies”, Institute of Actuaries/Faculty of Actuaries, GIRO Insurance Convention Lloyds of London, 2006, “Managing the Insurance Cycle”, Lloyds of London Lang, J., 2014, “Life Insurance in Australia – Profits falling”, www.actuarialeye.com Archer-Lock, P., Fisher, S., Hilder, I., Line, N., Shah, S., Wenzel, K. and White, M., 2003, “The Cycle Survival Kit”, Institute of Actuaries/Faculty of Actuaries, GIRO Insurance Convention Valenti, J., Edwards, B., Haggith, H., 2012, “The limitations of being human: A study of cognitive bias impacts on actuarial decision making”, Actuaries Institute, 2012 General Insurance Seminar Taylor, N., 2000, “Making actuaries less human - lessons from behavioural finance”, Staple Inn Actuarial Society Kahneman, D., Lovallo, D., Sibony, O., 2011, “The Bid Idea: Before You Make That Big Decision…”, Harvard Business Review Hammond, J., Keeney, R., Raiffa, H., 2006, “The Hidden Traps in Decision Making”, Harvard Business Review

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