Senior-citizen guaranteed-renewable block: a favourable-looking claim ratio, a long guarantee and short assets
A senior-citizen hospitalisation product accepts entry ages 60-75, is guaranteed renewable for life and guarantees premium rates for three years. It covers 22,000 policyholders at an average age of 68 and an average premium of ₹38,000; it is the insurer's only product in this segment. Second-year experience shows a claim ratio of 105%, hospitalisation frequency of 22% against 16% priced, and average length of stay of 6.8 days against 5.9. Average cost per bed-day is running 9% above assumption. Sixty per cent of reserves sit in three-year corporate bonds and the rest in one-year deposits, a legacy of a past liquidity preference. Reinsurance is a per-life cap of ₹15 lakh, and 5% of claims exceed it. Regulators and the press are sensitive to premium increases on senior citizens, and the sales force is resisting any redesign. The three-year rate guarantee for the largest cohort expires in 14 months.
1. Quantify the gap between priced and actual experience and assess whether the 105% claim ratio understates the underlying problem.
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Quantification. Priced claim cost per life in index units: 0.16 x 5.9 x 1.00 = 0.944. Actual: 0.22 x 6.8 x 1.09 = 1.631, about 73% higher than the pricing basis. Frequency alone is +37.5%, length of stay +15% and cost per bed-day +9%.
Why 105% understates it.
- The block is younger than the average age implied by the premium table. The 68-year average will drift upward as the cohort ages, and both frequency and stay length rise with age, so the 73% gap will widen before the next review.
- The claim ratio is a single accident year; a Q4-heavy portfolio carries IBNR and case reserves that may be understated at the year-end.
- Current rates were set two years ago on a younger cohort, and the guarantee prevents correction for another 14 months for the largest cohort.
- The ratio ignores the cost of capital held against a lifetime renewable morbidity guarantee and ignores fixed expenses spread over a small block.
Conclusion. Yes, it understates the problem. The correct benchmark is the trend in claim cost per life, not the current ratio: a 105% ratio on a block whose underlying cost is 73% above pricing and still rising is not 'close to breakeven', it is a cohort that will deteriorate materially at each future renewal.
2. Recommend how to manage the block over the next three years across pricing, asset-liability management and reinsurance, recognising the constraints.
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Pricing. For new business, increase rates 30-35% at entry, apply full age-rated loadings above entry age 65, and replace the three-year guarantee with a one-year guarantee plus a three-year smoothing commitment. Offer a ₹50,000 voluntary deductible: senior policyholders use it to control premium, and it removes a large slice of low-severity frequency cost. For the in-force cohort whose guarantee expires in 14 months, prepare a +20% increase with a documented experience exhibit for the regulator, and pair it with a voluntary deductible and a wellness discount so the increase can be presented as a choice rather than a levy.
Asset-liability management. Liabilities are guaranteed renewable, with an effective duration of perhaps 11-13 years and real morbidity exposure; assets have a duration of about 2.5 years. Extend to 7-9 years over 18 months using 10-15 year government securities and state development loans held to maturity, accepting some illiquidity and reduced yield. Do not reach for yield through credit in a block where the guarantee is long and the policyholder is elderly. If forward-starting swaps are available, hedge part of the reinvestment risk; otherwise disclose it.
Reinsurance. Raise the per-life cap to ₹25 lakh or add a per-life stop-loss above ₹15 lakh. With 5% of claims breaching the current cap, the retained severity is precisely the tail the insurer is least able to absorb. Expect a higher rate; the capital relief is worth it. Also seek quota share on the senior product specifically to share morbidity trend risk, which is the risk the insurer is least able to diversify.
Constraint acknowledged. Any of these can be portrayed as penalising the elderly. The credible public position is transparency: publish the frequency and length-of-stay evidence, and offer the deductible as the alternative.