Individual risk and the Base Benefit Multiplier (B.BM)

Individual risk and the Base Benefit Multiplier (B.BM)

Individual mortality risk is based on an individual’s risk profile. that measure individual risk include the following:

• Age

• Gender

• Country of residence

• Occupation

• Health (BMI)

• Lifestyle

The outcome of an individual risk assessment is the Base Benefit Multiplier (B.BM). Each individual is assigned a B.BM and the B.BM is re-evaluated yearly to account for changes in age and lifestyle. The B.BM is the first variable of the equation that is used to determine the benefit that will be paid out in the event of a successful claim.

Portfolio risk and the Benefit Multiplier Adjuster (BM.A)

As a standard risk management practice, insurance funds use mortality rates and actuarial tables to estimate the loss ratios (the amount of money paid out in claims) that a fund will expect to experience. Based on expected loss ratios, financial projections are drawn up and insurance policies are priced. As discussed previously, this approach is risky for the Takadao DAO fund and may result in fund insolvency. Instead Takadao will measure loss ratios in real time and adjust benefit payouts (by adjusting the benefit multipliers) to ensure that the targeted loss ratio is maintained and the fund remains solvent.

Portfolio loss ratios are dependent on the following :

• The composition of individuals in the fund (i.e. a fund that has only 30 year old's will have a lower loss ratio than a fund with only 65 year old's).

• The overall risk of the fund based on the composition of individuals in the fund.

• External events that impact a significant number of individuals in a fund (i.e. an earthquake, a pandemic, wars)

At any given time, there is a balance between the loss ratios and benefit payouts that optimize for the solvency of the fund. In case the loss ratios become too high to threaten the fund solvency, the benefit payouts will be reduced to bring the loss ratios back to the desired level. In the event that loss ratios are lower than expected, meaning the fund is performing better than expected, then benefit payouts and underwriting surplus are increased, benefiting all members of the fund.

The main concern of an adjustable benefit multiplier is whether it’s fair for the beneficiary of a claim. Will there be a scenario where a beneficiary will not receive a payout or that that payout is so low as to defeat the purpose of having insurance to begin with? In fact, dynamic underwriting was designed precisely to avoid these scenarios. Firstly, dynamic underwriting sets as its goal fund solvency, which means that there should not be a scenario where a beneficiary does not receive a payout. Secondly, the model shares the risk among many people, which means that if the loss ratios result in lower benefit payouts, the decrease is shared among many so that not one single individual will be disproportionately impacted. Furthermore, the increased underwriting surplus that results from lower than expected loss ratios are banked for subsequent years, which reduces fluctuations of the fund and enhances solvency.