6 _ Critical Illness Flashcards
CI cover
Overview of benefits
Lump sum that is payable if the p/h suffers one of the defined conditions
- product may offer instalments with balance being paid on death
- lumpsum can be used to purchase impaired life annuity
Payable upon:
- happening of critical illness event
- reaching a defined defree of impairment (loss of ability to walk/speak)
- undergoing a surgical procedure
Product is not designed to INDEMNIFY the p/h
Product can be standalone/rider/accelarated benefit
- SA: only paid on diagnosis of insured condition
- rider: Lump sum paid on CI and death
- accelerated benefit: Lump sum paid on death or CI, whatever occurs first
PURE PROTECTION product
No Surrender or Maturity value
Can have renewable option like term assurance
CI cover
Meeting customer needs
What can the lumpsum be used for
- Convert to income via an annuity
- repay mortgage or other loan
- fund medical costs when CI requires surgery or expensive treatment
- Business partners can purchase CI policies on the lives of each other so that benefits will fund the buyout of the stake in the partnership when CI arises
- fund change in lifestyle where necessary to improve claimant’s health (move to lower paid job)
- recuperation after illness, taxation planning, medical equipment
CI cover
Meeting customer needs
Simplicity vs Complexity
Simplicity:
- The lumpsum payout has a powerful draw for purchases wo are wary of insurers’ promises to look after them (In contrast to IP)
- Claims trigger of diagnosis or procedure is easy to explain and adds to the attraction of the product
Complexity:
- not comprehensive in the diseases and procedures covered (result of serious accidents and psychiatric illnesses - unless these result in permanent disablement)
- different definitions for critical conditions between insurers in the same market (although standardised in SA)
- Policy claim conditions are harder to grasp due to stricter requirements for covered conditions compared to colloquial interpretations from the headline.
- product is subject to excludsions and point-of-claim underwriting.
CI cover
Conditions covered
3 Characteristics of insurable conditions
Perceived to be serious and occur prequently
- some diseases are feared out of proportion to their actual incidence
- illness should be life or lifestyle threatening
- should not be so rare that there is a neglible risk of occurrnece
Clearly defined conditions
- avoiding ambiguity in the definitions is not easy
- e.g. only malignant cancers where tumours have invaded adjacent tissue
- e.g. heart attacks require proof of damaged heart muscles
- want to avoid windfall payments for less serious conditions
Sufficient data available to price the benefit
- need sufficient data to estimate incidence rate
- advances are difficult to predict
CI cover
Conditions covered
Core and additional conditions
Core conditions:
1. Cancer
2. coronary artery by-pass surgery
3. heart attach
4. kidney failure
5. major organ transplant
6. multiple sclerosis
7. stroke
Other conditions:
1. Alzheimer’s disease
2. AIDS/HIV contracted by blood transfusion
3. AIDS/HIV contracted during occupation
4. aorta graft surgery
5. benign brain tumor
6. blindness
7. coma
8. deafness
9. heart valce replacement or repair
10. loss of limbs
11. loss of speach
12. motor neurone disease
13. paralysis
14. parkinsons
15. third degree burns
CI cover
Conditions covered
Terminal Illness
Does not relate to a specific disease, but involves the severity of a condition and its effect on life expectancy.
For accelation product:
- effect of terminal illness cover is to bring forward the payment of the death benefit
- cost of benefit is small
CI cover
Conditions covered
Children’s benefit
- rider benefit providing simlar cover the insured parent’s children
- policy does not lapse when children claim, only when parent
CI cover
Product variations
Tiered benefits
- Sum insured is linked to the severity of the disease
- proportion of full benefit is paid out that depends on thhe extent of illness at claim
- further claims may be lodged if the diease advances, then payments are made from the balance of the sum insured
- policy terminates when 100% of SI is paid out
- premiums do not reduce with proportionate payments
Why is this offered?
- CI becomes more comprehensive, since benefits are paid for less severe conditions
- payments more closely match medical distress and financial reed, reducing the incentive for anti=selections and exaggeration of symptoms at claims stage
- multiple claims are possible which increases p/h satisfaction and retention
- permits insurers to differentiate from competitors
- makes comparisons more difficult
- potential for higher degree of claims dispute
CI cover
Product structure
Without profits or unit-linked
CI cover
TPD (total and permanent disability) cover
- often included in CI cover
- compliments CI cover
- different nature of criteria for payment - p/h is permanently severely disables
- cost depends on the definition of diability : Occupation based, ADLs, working activities or functional abilities
- IP covers temporary and permanent disbability
- waiting period to determine permanency
CI cover
Group products
Employer for staff as part of overall benefits package
trade unions and members of associations such as co-operative societies
- usually where IP is not available (blue collar occupations)
key requirements:
- definition for elibility to the scheme
- benefits are clearly defined by size, defintion of claim and period of benefit
CI cover
Risks to the insurer
Main risk: rates of diagnosis of critical illnesses
- limited info in most markets
- estimates of historical experiences are unreliable
- different insurers cover different illnesses
- industry data could be heterogeneous
Anti-selection risk
Withdrawal risk:
- selective withdrawals for standalone policies
- reduced with WP
- financial risk when asset share is negative
Expense risk
- standalone contracts
Investment risk = minimal
CI cover
Tiered benefits: risks
Problems in designing benefit levels
- diffulty in defining the additional stages that trigger benefit which are legally and medically objective and understandable to p/h
- weaknesses in defs could result in more claims and disputed claims
Problems in pricing the benefits
- need to find four times as many rates for severity levels and transition intensities between them
- for all ages and both sexes, smoker status
- leads to siginifanct margins in assumptions
- overlap between related illnesses makes pricing more complex
- workaround: no guarantees, significant margins and co-operation with reinsurer
Problems in underwriting
- initial underwriting will need to be stringent, which costs time and money
- underwriter is faced with the prospect that the bringing forward of potential claims situation sin going to increase the importance of any pre-existing conditions and change the serioussness of non-disclosure
- claims manager faced with mroe claims forms, complex defs and significant pressure from p/h to upgrade benefit levels
