Value Creation Through

Behavioural Life Insurance

Adam Stolz

Greg Morris

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.

Contents

1. Challenges to Traditional Life Insurance Value Proposition

2. New Dynamic Value Proposition

3. Case Study: Discovery South Africa

4. Application to Australian Market

2

The nature of risk is changing

Oxford Health alliance

Disease burden linked to lifestyle

factorsTechnology will impact the

assessment of health risks

3

Price fixed at

inception

YearsYr 0Yr 1Yr 2Yr 3Yr 4Yr 5Yr 6Yr 7Yr 8Yr 9 Yr

10Market premium

Force of

staying for sick

Force of

leaving for

healthy

Premium

Risk adjusted

premium$120 $450

Average premium

per family$300 $300

Traditional model is vulnerable

4

Traditional life insurance reliant

on static, upfront underwriting

One ultimate mortality

assumption for lives that

are potentially

heterogeneous with

respect to long term

mortality/morbidity risk

Ris

k

Duration / age

Ultimate

Select

Current rating factors

only use information that

is available at policy

inception

No way to collect

additional information

post-inception hence the

risk assessment is not

updated dynamically

risk

Socio-economic

status

Smoker status

Gender Health status

Changes in smoking status

Wellness behaviour

5

Individual behaviour is irrational

Impact of time horizon (hyperbolic discounting)

Day 0 Day 1

$10 $11

✓ X

Day 30 Day 31

$10 $11

✓X

Near term decisions

Longer term decisions

6

Disconnect between traditional life

insurance model & customer behaviour Principals of behavioural economics in health and wellness

ExplanationIndividuals are generally overconfident in their own

abilities and prospects, including their health

Principal O V E R C O N F I D E N C E

A N D O P T I M I S M

Individuals generally dislike losing something twice as much as they like gaining something. This makes health behaviour

changes that require loss particularly challengingL O S S A V E R S I O N

Individuals tend to pay little attention to the small but cumulative

consequences of repeated decisions, and frequently ignore the impact of repeated risky behaviours

F R E Q U E N T E V E N T

M I S C A L C U L A T I O N

Future rewards of a healthy lifestyle are significantly undervalued relative to cost today

H Y P E R B O L I C D I S C O U N T I N G

Positive reinforcement and indirect suggestions can influence the motives, incentives and decision making of

individuals to positively impact on their health and wellnessN U D G E T H E O R Y

People continue to follow the path of least resistance when

it comes to decisions about their health and wellnessS T A T U S Q U O B I A S

Rewards through financial incentives have been proven to be

successful in incentivising healthy behaviourF I N A N C I A L

I N C E N T I V E S7

New Dynamic Value Proposition

Key Attributes

8

, leading to

Provide access to health

partners to allow

policyholders to engage in

healthy behaviours and

monitor the level of their

engagement

Ongoing access to

Health and wellness

programme

Incentives and rewards

provide a strong motivation

to policyholders to monitor

and improve their health

Use learnings of

Behavioural

Economics to nudge

policyholders towards

healthy behaviours

Pass back the more

accurate risk assessment

in form of upfront

discounts, ongoing

premium adjustments and

cash back benefits

Dynamic pricing and

rewards to reflect

policyholder

engagement over

time

8

“The

Vitality Points StructureVitality Program Structure

Discovery Life is a leading Life Insurer in South Africa

For nearly two decades, Discovery has offered the successful Vitality Program

As you interact with Vitality and get healthier, earn Vitality points which determine Vitality Status

9

New Dynamic Value Proposition

Vitality Program

Mo

rtal

ity

Rat

e -

qx

Age

Traditional curve

Dynamic underwriting curve

Average Discovery price

Unengaged

Engaged

(5% - 10%) Market Competitive

Pricing Corridor

Case Study: Discovery South Africa

Dynamic Underwriting

10

-

500

1,000

1,500

2,000

2,500

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Cu

mu

lativ

e p

rem

ium

(d

isc

ou

nte

d)

Year

Cumulative premium by status

Non-int Bronze Silver Gold Platinum

Case Study: Discovery South Africa

Significant customer value across Vitality statuses

11Most engaged

MorbidityMortality

Case Study: Discovery South Africa

Life insurance claims experience

Unengaged Moderately engaged Highly engaged Unengaged Moderately engaged Highly engaged

Non-Vitality

Non-Vitality

12

Non-Vitality

Case Study: Discovery South Africa

Lapse experienceLa

pse

s as

a %

of

no

n-V

ital

ity

Unengaged Moderately Engaged Highly Engaged

Lapse

13

http://www.youtube.com/watch?v=argDqTJRUxw&feature=youtu.be

• 5% switched when provided with nutritional information• 43% switched when offered an incentive

• Consistent with many behavioural economics studies showing the power of incentives on behaviour

Application to Australian Market

Behavioral economics experiment

14

Lump sum

Income

Protection

PRODUCT FEATURES

Product Bronze Silver Gold Platinum

Initial Discount 0.0% 0.0% 0.0% 0.0%

Annual Premium “flex” 0.0% -0.5% -1.0% -2.0%

Premium Lower Bound 0.0% -5.0% -10.0% -15.0%

Cash Back Every 5th year 0.0% 0.0% 0.0% 0.0%

Product Bronze Silver Gold Platinum

Initial Discount 7.5% 7.5% 7.5% 7.5%

Annual Premium “flex” +1.50% +0.75% 0.0% -1.0%

Premium Lower Bound -20.0% -20.0% -20.0% -20.0%

Cash Back Every 5th year 2.0% 4.0% 8.0% 10.0%

15

Application to Australian Market

AIA Australia Integrated Vitality

Take-up rate of approximately 30% of new retail

annualised premium observed in first 12 months

Expectation that take-up rate and customer engagement

will increase over next years

Application to Australian Market

Progress so far

AIA launched Vitality

Program in Australia

in March 2014

AIA pricing basis

adapted to partially

reflect Discovery

South Africa

experience

Discovery South Africa has over 15 years of claims and lapse

experience

Experience in Australia may vary due to difference in Socio-

economic, Product definition and Vitality engagement factors

Product features and assumptions adjusted to allow for

anticipated differences between Australian and Discovery South

Africa experience

Claims and Lapse experience for Australian policyholders to be

monitored over time and reflected in on-going adjustments to

pricing basis and product design

16

Questions?

17