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IFoA SA1 study materials
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IFoA SA1: Life and health insurance products, design and pricing

IFoA SA1 · Work through your exam, one topic at a time.

All guide sections

Life and health insurance products, design and pricing

Product map

  • PMI: annual, reviewable, indemnity or network-based; pays for private treatment, not income. Group PMI is experience-rated with credibility weighting.
  • Income protection: replaces earnings; key levers are deferred period, occupation class, benefit limit (commonly 50–65% of earnings), state-benefit offset, waiver of premium and guaranteed insurability option.
  • Critical illness: lump sum on ABI-defined conditions with a survival period (typically 14–28 days); additional payments cover less severe conditions.
  • Long-term care and cash plans: ADL-triggered benefits or fixed cash amounts per treatment.

Design levers

Underwriting basis (full medical underwriting versus moratorium, where the insurer carries claims uncertainty for the first five years); excess and co-payment to cut small claims and administration; deferred period, the largest single cost lever for income protection; network restriction to control provider cost; indexation and GIO, both options that must be priced.

Pricing

Gross premium = (expected claims + expenses + commission) / (1 − profit and contingency margin). Commission is a percentage of gross premium, so it belongs in the denominator.

Worked example

PMI: expected claims £360, per-policy expenses £60, commission 10% of gross premium, profit and contingency 8%. P = (360 + 60) / (1 − 0.10 − 0.08) = 420 / 0.82 = £512.20; note it is not 420 × 1.18. Income protection check: incidence 2.5 per 1,000, average claim 2.8 years, benefit £30,000 gives expected annual claim cost 0.0025 × 2.8 × 30,000 = £210 per policy. Extending the deferred period from 4 to 13 weeks cuts incidence from 4.0 to 2.5 per 1,000, saving £126 per policy - larger than most plausible expense savings.

Traps

Commission in the numerator; pricing income protection on incidence alone and ignoring duration; ignoring the cost of options such as GIO and indexation; treating a small group's experience as fully credible; forgetting that reviewability is a promise that must be honoured in pricing.