Ch 5: Income protection insurance Flashcards

1
Q

Discuss the customer needs met by income protection products

Main needs (8)

Perceived needs (5)

Other needs (3)

Other general needs (5)

A
  • Main needs
    • Income replacement
      • peace of mind (income stream while unable to earn)
      • if state sickness/disability income insufficient
      • employment benefits short term (employer continues to pay employee’s income)
    • Match loan servicing costs
      • protection against inability to meet major financial loans
      • required by lender
      • may cover unemployment
  • Percieved needs
    • protect ill-health uncertainty
    • minimise risk of disruption to financial wellbeing esp with dependants
    • treatment bills unknown (disability/sickness often unknown)
    • value financial comfort

​​

  • Other needs
    • fund other insurance prems
    • premium waiver
    • IP on professionals in practice
  • Other general needs
    • clear purpose
      • in risks covered/benefits payable
      • easily understood, with unclear interpretations in clear favour of claimant
    • appropriate charging structure e.g. addition of options/guarantees
    • reasonable premiums
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2
Q

List the key features of an IP contract

(8 main points, 11 subpoints)

A
  • Replaces income
    • would’ve earned if becomes unable to work due to accident/illness
    • from temporary annuity continuing until insured recovers/dies/annuity term ends, whichever comes first
  • May be commutable (to provide lump sum/ not generally the case)
  • Circumstances clearly defined for benefits to become payable/cease
    • Not covered
      • unemployment, redundancy, early retirement, reluctance to return to work, some illnesses/physical injury e.g. HIV, attempted suicide
  • Benefits do not cease on claim
    • cover still provided if recover and return to work
  • Level/increasing premiums/benefits
    • may be at fixed rate relative to sum assured
  • No surrender/maturity value
    • sum at risk is very large compared to regular premium.
    • once expenses/expected claims taken into account, little surplus left to build asset share
  • Own/similar occupations
  • With profits/unit linked
    • mostly without profits basis, no benefit paid if claim is not made
    • bonus builds up death/expiry benefit, so bonus doesn’t affect IP claims
    • unit linked policies may have a morbidity charge deducted from fund, wiith remaining unit fund at end of policy term paid as maturity benefit
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3
Q

What are some key requirements regarding policy conditions on IP contracts?

(3 kay points, 6 subpoints)

A
  • Must reflect true intentions of product
  • Some cushion over events for which insurer has no control
  • Simple and unambiguous
    • ensures important risks transferred to insurer
    • clear what info required
    • accurate underwriting
    • rapid underwriting process
    • ensure low claim rejections
    • reduce non qualifying claims
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4
Q

What kind of product variations are possible on IP contracts in terms of guarantees/reviewability of premiums?

A
  • Guaranteed/renewable premium rates
    • full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
      • requires substantial loadings (very long contracts, maybe high standard error for claims experience)
      • higher reserves
    • no guarantee
      • annual review
      • comfort knowing premiums can be adjusted due to bad experience
      • difficult at outset
        • risks change
          • sickness that would’ve caused death, can now impair lives, leading to claims
          • terminal illnesses no longer terminal
        • market pressures may limit premium increases
        • selective lapsing, leading to portfolio with only poor lives left
        • PRE: careful not to create expectations of no increases
        • maximum increases
        • uncertain future premium amounts
    • some guarantee
      • e.g guaranteed for first five years, with complete freedom review after
  • Guaranteed insurability
  • No claims discount
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5
Q

What options may we find with respect to benefits/premiums on IP contracts in terms of escalation? (8)

A
  • May be subject to a cap
  • Index or fixed rate
    • escalation rate < earnings inflation
    • difficult to match too high escalation rate
  • Escalation rates might be different in and out of claim (can lead to complex product design)
  • Premiums increase
    • same rate as benefit (premium assumptions prevailing when original contract effected)
    • required for additional cover at given age (protect against advers exper)
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6
Q

What are some important points to bear in mind when setting claims definitions for IP contracts? (4)

A
  • Claim definitions
    • need to strike a balance btwn meeting needs/controlling insurance risk
    • can be difficult to assess incapacity, ADLs are objective
    • should be allowance for interpretation
    • price charged for contract may differ for different risks represented
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7
Q

What kind of claims definitions do we have for IP contracts?

(1,6)

(1,7)

A
  • Occupational based
    • inability to perform own occupation (very expensive/greatest level of cover)
    • inability to perform own/reasonable occupation
      • by education, status, training
    • own occupation initially thereafter
    • inability to perform any occupation
      • offered where occupations carry above average accident/health risk
  • Alternative incapacity criteria
  • assessing impact of illness on insured’es ability to perform tasks required by an occupation or day-to-day life
    • activities of daily living
      • physical activity (feeding, dressing, washing, toileting, mobility, transfer)
      • mental capacity (overides tests of physical incapacity
    • functional assessment tests
    • activities of daily working
    • personal capability assessment
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8
Q

What kind of benefit definitions might exist for IP contracts?

(5 points, 16 subpoints)

1 other important overall point

A
  • Replacement ratio (level of post-claim income to pre-claim income, net of taxes in both cases)
    • easy to calculate
    • tax impacts ratio (some regions do/don’t tax benefits)
    • level indicates claim experience
      • higher/lower => might dissentivise/incentivise return to work
    • limits
      • ensure individuals have incentive to return to work
  • Maximum benefit specified
    • in terms of salary at claim time
    • in terms of state benefits
  • Benefits expressed as cash amount (requires annual review to check needs met)
  • Benefits in form of premium waivers
    • waived when benefits are payable
    • charged for by a small percentage addition to premium rate
  • Proportionate/rehabilitation benefits
    • for those returning to work on part time basis/less strenuous/lower paid role
    • benefits both insured/insurer
    • recuperation needs (attractive to policyholders, doesn’t add sign cost)
    • benefit relates to ratio (that gross earnings from new role bear to those from occupation against which disability was being claimed
  • Benefit definitions mustn’t disentivise insured returning to work
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9
Q

What is over-insurance in the context of IP contracts (1), and how might it arise? (5)

A
  • When benefit is more than is needed e.g. a higher than appropriate replacement ratio
  • Arises
    • from outset
    • subsequent to sale (salary not keeping up if benefits increase automatically on policy anniversary)
    • reduction in tax on IP claims
    • multiple policies
    • non-disclosed income
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10
Q

How do we address over insurance in the context of IP contracts? (5)

A
  • Addressed
    • appropriate maximum benefit
      • max replacement ratio
      • stringent limitations for salaries in excess of limits
      • overall max benefit level
      • deductions for other benefits
    • review benefit level appropriateness
    • clear policy conditions
    • claim stage
    • financial underwriting
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11
Q

Other policy definitions on IP contracts:

  • Waiting period (3)
    *
A
  • Watiing period
    • specified period after policy start during which benefits won’t be paid
    • may also apply to additional cover sought
    • reduce potential for anti-selection
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12
Q

Other policy definitions on IP contracts:

  • Deffered period definition and characteristics (3)
  • Deffered period benefits (5)
A
  • Deffered period
    • period of incapacity/sickness during which insured won’t pay benefits
    • split deferred period: eg pay half over for certain amount of weeks, full amount after
    • early notification (even before deferred period end so insurer can help with rehabilitation)
  • Deferred period benefits
    • integrate with employer-supplied benefits
    • reduce claim cost
    • reduce administration cost
    • reduce number of trivial claims
    • meet customer needs: eg won’t want to claim for few days off for flue!
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13
Q

Other policy definitions on IP contracts:

  • Linked claims period (2)
    *
A
  • Linked claims period
    • waive deferred period if same sickness recurs within certain amoutn e.g. 26, or 52 weeks
    • encourage work return
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14
Q

Other policy definitions on IP contracts:

  • Expiry age/term (3)
    *
A
  • Expiry age/term
    • age at which benefits cease; often same as normal retirement age
    • exact duration
    • shorter premium paying period
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15
Q

Briefly discuss group IP contracts

General (8)

A
  • General
    • legal obligation eg some countries sick pay during first 2 weeks if sick
    • discretionary benefits (after statutory period, together with illhealth income)
    • may be just administration
    • tax advantages
    • cheaper (economies of scale)
    • smooth early retirement (when employee continuing in poor health)
    • cover employer’s statutory sick pay payments
    • promote health (and ensure speedy return to work following operation)
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16
Q

Briefly discuss group IP contracts

Benefits (3)

Continuation option (3)

A
  • Benefits
    • level (based on salary gross of tax, usuall max 2/3 - 75%
    • additional (pension contributions, state welfare contributions)
    • in claim escalation
  • Continuation option
    • allows employee of company to effect individual policy withouth providing evidence of health when he leaves service of employer
      • anti-selection
17
Q

What are the key risks to the insurer arising from selling IP contracts?

A
  • Rates (uncertainty because well defined claim criteria => more risk)
    • claim inception rate (age, gender, smoking habits)
    • claim termination rate (age, duration, gender, smoking habits)
  • Data
    • standard tables
      • advance in medicine
      • changes over time in opion
      • changes in nature of work
    • industry experience
      • mix of business
      • levels of benefits
      • terms and conditions
      • claims definitions
      • initial underwriting strength
      • claims underwriting
      • claims management
  • Anti-selection (significant for individual, reduced for group)
  • Withdrawals (selective withdrawals, negatie asset share)
  • Moral hazard (robust policy condition/wording)
  • Lesser risks
    • mortality, expenses, investment
18
Q

What are the capital requirements typically found with IP contracts?

A
  • Lower than for other contracts
  • Frequency of premium
    • could be significant for single premium contracts
    • more uncertain about what future experience will do
  • Initial expenses (aquisition/commision costs)
  • Solvency capital reqiurement (due to difficulty prdicting future morbidity)
  • Contract design
    • endowment/whole life, becuase there’s chance benefit never paid
  • Reserving basis
    • prudence may need to be greater because difficult to predict sickness experience