COVID-19 broke out in practically every corner of the planet in 2020, making it a year of public health. Whether ordinary citizens or government elites, people have become increasingly concerned about their own physical conditions, public healthcare systems, and related health risks that may be induced by the broader epidemic or individual unhealthy lifestyles.
The theme of the 2021 SOA Student Research Case Study Challenge addressed this pressing phenomenon by assigning students to develop a parametric insurance product that protects individuals or communities from global health risk. With the new policy, people will be shielded against any financial loss caused by emerging health concerns such as obesity, high cholesterol, and diabetes. Under the revolutionary parametric plan, companies can save maintenance costs in today’s highly efficient environment thanks to the straightforward underwriting process and single reimbursement based on a specified triggering event or index.
Team HKU Actuarial Solutions from the University of Hong Kong is one of the finalists (Top 6 teams out of 64 teams globally) of the SOA Challenge. We have proposed a parametric insurance product NewVision to protect against short-sightedness (also known as myopia) that is going to worsen as technology becomes more integrated with our life. With NewVision, high myopes can be safeguarded from possible vision-related illnesses, such as glaucoma and cataract, that are caused by short-sightedness.
Brainstorming the product
We have followed a brainstorming checklist we had come up with in our last project, Marriversary - divorce endowment insurance. This four-section list ensures that our ideas are realistic and feasible.
First and foremost, we constructed a product description by defining the underlying risk to be insured by the product. We also laid out possible cash flows of the product.
Then, we reviewed the insurability of the brainstormed ideas, which is known as actuarial considerations. Considerations include whether the risk event is objectively measurable and diversifiable, any possible scenario of adverse selection or moral hazard, etc.
In order to prevent the aforementioned moral hazard and adverse selection, we did not choose standard health metrics that can be easily controlled by individuals, such as BMI and cholesterol, as the underlying global health risk. Hence, our focus is to explore a health metric that is unlikely to be manipulated by policyholders.
Access to data is also critical to ensure the brainstormed idea is feasible to price. However, we are provided with a limited amount of data since we are unable to obtain a comprehensive database besides academic journals available, which negatively affects underwriting as well. Therefore, we limit the coverage of this policy to newborns so that population data can be used to price the product.
The third section is business considerations. Marketing is essential to achieve targeted profit. We looked into customer’s demands and other similar products in the existing market to design marketing plans to make our product reach potential customers. NewVision, in particular, is the first-ever parametric insurance product that covers vision care, so we do not face any competitors. We also targeted parents and parents-to-be by creating NewVision as an insurance product that protects a child’s vision.
Last but not least, we also consider possible product variations. During this stage, we asked ourselves what could be changed, and whether alternatives would be better to justify that the original idea is best among similar products. In this project, we considered similar risks like long-sightedness, astigmatism, but we found short-sightedness to be the best due to its prevalence and rising demand for protection in the market.
Iterative development
One of the most interesting things about pricing is that the above process is iterative: change of a feature will affect other parts of the project. That is why we have to keep the above four sections in mind throughout the whole project.
One of the challenges involves setting the trigger level for benefit payment. After building a pricing model with premiums and financial figures, we encountered a problem: it is too expensive to protect against all short-sightedness cases. Thus, we increased the severity of short-sightedness required before a payout occurs. However, if the triggering point is too high, there is too little research data available, causing a huge amount of pricing risk.
After balancing both factors, we finally decide to use the cutoff of high myopia defined by the World Health Organization. The decision is also supported by our sensitivity and stochastic analysis. Results in our model will have acceptable confidence intervals and the severity of key risks are listed out.
The result
After many cycles of development and problem solving, we finally came up with a product which led us to the SOA finals.
Our team HKU Actuarial Solutions was honoured to have an absorbing, fruitful, inspiring and leisure presentation and discussion with the panel of judges. With the increasing trend of myopia reaching epidemic proportions in our world, the value of this product goes beyond insurance and in fact it is more like a revolutionary parametric eyecare protection for your children and the younger generation.
We, the HKU Actuarial Solution Team, will keep on developing our skills in the actuarial field. And one day, we hope we can continue to innovate insurance and bring greater good to society.
What’s more
For more details, take a look at the original files for NewVision:
Remember to connect with us on LinkedIn:
- Jackson Leung,
- Elaine Cheng,
- Tiffany Wong,
- Elizabeth Zhu, and
- Kelvin Cheung.