Actuary = risk averse ?

Published in ‘International News’ SoA International Section, January 2018

Author: Queenie Chow, President of Young Actuaries Advisory Board, Australia

Actuary = risk-adverse?

The stereotype of an actuary is often associated with adjectives like “conservative”, “risk-adverse” and “meticulous”. Indeed, most actuaries like to get things right and that means exactly right – quotation of numbers should be right down to the decimal point. Yet, this is certainly not all the talent that an actuary has to offer.

Recently, a colleague complained saying: “actuaries should never be in the room when we discuss about new innovative products, they just scare all our partners away with their risk analysis!” As an actuary working in micro-insurance innovations and product development in Kenya, my colleague still has a long way to go in learning about the actuarial profession.

Indeed, innovation often goes hand-in-hand with risk-taking. Whilst actuaries are the experts of risk management, this does not translate to a zero-risk tolerance. Allow me to use pricing in micro-insurance product as a case in point. One of the greatest challenges facing micro-insurance product development is the constraints of data availability on similar products. The lack of past experience can lead to high risk loading in pricing as a result of the great level of uncertainty. If the premium rates are set higher than actual experience due to conservative assumption setting, low take-up will likely result. Not only will the product be perceived as unaffordable, it is furthermore providing poor value for low-income households with limited financial means. The risk of anti-selection also emerges as over-priced product will likely attract individuals with higher risk profile. So, how can actuaries over-come this mis-match dilemma between premium affordability and data restrictions in pricing micro-insurance products?

All actuaries are trained on the well-known actuarial control cycle – specify, develop and monitor – which emphasizes on the importance of repeated feedback loop in product management. The use of pilot testing (i.e. a small, simple controlled experiment of the product) is most fundamental to product development whilst limiting risk exposure level. Moreover, it is precisely an application of the actuarial control cycle in solving real world business problems. Not only does a pilot put your product to test in its operations and market demand, it will also provide valuable insight and collection of data which can be used in pricing. It is only through continuous monitoring and revision that accurate pricing assumptions can be validated for scaled-up products. Whilst actuaries have much to offer in accurate calculations, the even greater value of an actuary lies in his/her judgment and decision of materiality during this iterative control cycle.

“The biggest risk is not taking any risk…in a world that is changing really quickly, the only strategy that is guaranteed to fail Is not taking risks.” Mark Zuckerburg.

As actuaries – the natural leaders in risk – we are not opposed to taking risks, rather we strive to better manage risks in order for our stakeholders to succeed in an uncertain environment.

Earning trust from our micro-clients

Author: Queenie Chow, President of Young Actuaries Advisory Board, Australia

Earning trust from our micro-clients

“Where is your office located?” – is one of the most frequent questions we get from customers when selling micro-insurance through direct retail channels in Kenya. You may wonder, what does the physical location of our office has to do with the purchase of insurance? The real meaning behind this question is: if you don’t pay a claim, where can I physically hunt you down for my payment? Selling insurance is not easy, especially in an emerging market. Earning and maintaining trust with customers undoubtedly continues to be one of the greatest challenge of the insurance industry.

As far as trust goes, insurance companies typically have a poor reputation. Global research indicates that consumers trust insurance companies less than banks, car manufacturers, online shopping sites and supermarkets. With its complex rules, complicated product design, fine print, lengthy processes and even non-payment of claims, it’s little wonder why customers distrust insurance. In the micro-sector, the lack of understanding of insurance further deteriorate its perception. The low-income segment are unsure about paying in advance for a service that they may or may not receive in the future from an institution that they do not know, at worst, do not even trust. So how can insurance companies be creative, innovative and revolutionize customers’ experience in overcoming these challenges?

A free trial is generally recognised to be establishing good will and trust with new customers, why not with insurance? The freemium and loyalty insurance products distributed via a mobile network operator (MNO) is one solution which has emerged to address the distrust challenge. Under such business model, the Telco pre-paid customers are awarded a free insurance benefit as a loyalty benefit based on the amount of airtime they purchase. That is, the more airtime customer top-up, the greater the free insurance coverage they will earn. After the trial period, customers will be also be sold on paid insurance products. In turn, MNOs can create brand loyalty and retain customers in an increasingly cut-throat markets. In some instances, MNOs can also earn an additional revenue stream through a profit-sharing model.

Indeed, in leveraging the established brand name, network of distribution points and large client base of an MNO, insurance company can build trust through such partnerships. Moreover, there is a strong correlation between the frequency of transactions and levels of trusts. Some research shows that greater than 45 million lives has been insured globally through a MNO partnership model in the emerging market. In some markets, as high as 85% of the customers are new to insurance and are unfamiliar with how traditional insurance works. In my recent work of managing direct consumer insurance products, it is further found that successful freemium products prepares the market for paid voluntary insurance products. Of course, no one business model is without its weakness. The success of partnership is highly driven by the marketing and customer education efforts made by the MNO giving little control to insurers. More importantly, the customer value and variation of insurance products offered through the MNO models have often been questioned.

Whilst the freemium MNO distribution model enables a minimal trust level with customers, ultimately trust with customers are built on paying claims. The action of paying claims certainly speaks louder than any words, but the pattern of paying claims is what earns the full trust of customers. With a consistent pattern of paying claims, customers will no longer doubt insurance companies in looking for its physical location!