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 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

Soft Soft Soft

Time

Pric

e/P

rofita

bili

ty

HARD

Increased Profitability

Increased Capacity

Increased Competition

Reduced Prices Weaker Terms

Reducing Capacity

Reducing Competition

Increased Prices Tighter Terms

SOFT

HARDENING SOFTENING

Reduced Profitability

The Insurance

Cycle

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

APRA Insights Bulletins 1998-2008

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

Jun

-98

Jun

-99

Jun

-00

Jun

-01

Jun

-02

Jun

-03

Jun

-04

Jun

-05

Jun

-06

Jun

-07

Jun

-08

Jun

-09

Jun

-10

Jun

-11

Jun

-12

Jun

-13

Jun

-14

RO

E

Return on Equity

Investment

linked

Non-

investment

linked

Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014 -25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

20%

Ju

n-0

8

De

c-0

8

Ju

n-0

9

De

c-0

9

Ju

n-1

0

De

c-1

0

Ju

n-1

1

De

c-1

1

Ju

n-1

2

De

c-1

2

Jun

-13

De

c-1

3

Ju

n-1

4

De

c-1

4

Pro

fit

Ma

rgin

Profit margin - Group Lump Sum

Source: APRA Quarterly Life Insurance Performance, Jun 2008 to Dec 2014 -25%

-15%

-5%

5%

15%

25%

35%

Jun

-08

De

c-0

8

Jun

-09

De

c-0

9

Jun

-10

De

c-1

0

Jun

-11

De

c-1

1

Jun

-12

De

c-1

2

Jun

-13

De

c-1

3

Jun

-14

De

c-1

4

Pro

fit

Ma

rgin

Profit margin - Group Disability Income

Factors that contribute to the Cycle

Accounting year basis

Market is inefficient

Information delays

Decision delays

Implementation delays

Strategies to Manage Insurance Cycles

Strategies to Manage

Insurance Cycles

Time

Pric

e/P

rofita

bili

ty

Strategies to Manage

Insurance Cycles

Recognise where you are in the cycle

Sustainable product design

Don’t follow the herd

Maintain sound pricing discipline

Product and service differentiation

Strategies to Manage

Insurance Cycles

Earlier recognition of emerging experience

Effective relationship management

Reward returns not volumes

Revise business plans and targets

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

Loss Aversion / Prudence bias

Competitive reaction

Anchoring bias

Confirmation bias

Overconfidence 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

48

million

107

million

AIA

Anchoring Bias

Question

Is the number of doctors in

India greater than 200,000?

Is the number of doctors in

India greater than 1,000,000?

Answer: 840,000

500,000

2,590,000

AIA

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

Disclaimer

The content is current as at the date set out on the cover page of this presentation and may be subject to change.

This presentation provides general information only, without taking into account the objectives, financial situation, needs or

personal circumstances of any individual. This presentation may contain projections concerning financial information and

statements concerning future economic performance and events, plans and objectives relating to management, operations,

products and services, and assumptions underlying these projections and statements. It is possible that actual results and financial

conditions may differ, possibly materially, from the anticipated results and financial condition indicated in these projections and

statements.