Ch 5: Income protection insurance Flashcards
1
Q
Provide an overview for IP products
7
A
- Aim is to replace part of income that the insured would have earned if they became unable to work due to accident/disability/illness. (incapacity)
- IP=PHI Sanlam
- Benefit is regular income during period of incapacity after the deferred period ==> Temp annuity until recover/death
- Can be a lump sum in terminal cases.
- Policy wording definitions are NB for conditions benefits are payable and when it will cease
- Excl unemployment,early/retirement,reluctance to work
- No benefits on surrender or maturity.=> SA large compared to premium so AS small after expenses and claims
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
- Not covered
-
Benefits do not cease on claim
- cover still provided until 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
3
Q
Discuss the customer needs met by income protection products
Main needs (3,2)
Perceived needs (4)
Other needs (3)
Other general needs (5)
A
-
Main needs
- Income replacement (protection)
- protection against loss of income stream while unable to earn
- ST: employer continues to pay employee’s income in deferred period
- LT: if state,personal resources,insurance is income insufficient
- Income adj to match needs:
- protection against inability to meet debt repayments
- required by lender waiver of mortgage insurance.
- Income replacement (protection)
-
Percieved needs
- protect ill-health uncertainty disability and sickness is unpredictable
- minimise financial risk of incapacity esp if dependents
- Need for IP is often underest as only concerned about risks aware off.
- value financial comfort, psych benefit
-
Other needs
- Income to fund other insurance products
- WOP benefit can free up funds as rider
- IP on professionals in practice locum protection insurance pays employment costs
-
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
- clear purpose
4
Q
What are some key requirements regarding policy conditions on IP contracts?
(5)
A
- Wording needs to cover procedures for claim,lapse,recovery,death,retirement,partial recovery
- Clear and understandable
- Must reflect true intentions of product
- Some cushion over events for which insurer has no control eg war exclusion
-
Simple and unambiguous
- ensures important risks transferred to insurer
- clear what info required
- accurate and fast underwriting
- ensure low claim rejections
- reduce non qualifying claims
5
Q
What kind of benefit definitions (amount) might exist for IP contracts?
(4 points, 7,3,2.4)
1 other important overall point
A
-
Replacement ratio
- ratio of post-claim income to pre-claim income, net of taxes in both cases
- tax impacts ratio (some regions do/don’t tax benefits)
- indicator of claim experience
- higher/lower => might dissentivise/incentivise return to work
- 1%+ RR ==> 1%+ claims
- limits on RR are defined
- ensure individuals have incentive to return to work
- Reduce cost of claims by encouraging rehab back 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 covered (attractive to policyholders, doesn’t add sig cost)
- benefit reduced so overall income level is compensated.
- Benefit definitions mustn’t disentivise insured returning to work
Acronym here
6
Q
What is the benefit definition (amount) for Escalating Benefits and Premiums
(6,2)
A
- Benefit Escalation:
- May be subject to a cap high escalation rates make ALM difficult
- Level benefits are uncommon
- Index or fixed esc rate more common
- escalation rate < earnings inflation ==>RR low, incentive
- Escalation rates:
- Can + at same rates in and out of claim
- Can + at different rates in and out of claim (can lead to complex product design)
- in claim and 0% out of claim
- Benefits out of claim see prems
-
Premiums Escalation
- same rate as benefit out of claim (premium assumptions)
- required for additional cover at given age (protect against advers exper)
7
Q
What is the benefit definition (amount) for Over Insurance?
1,4,5,1,1
A
- Higher than appro RR
- Can arise from :
- Over insurance at outset
- Subseq Over insurance due to increasing benefits and salary
- Decreased tax on benefits
- Multiple policies or non-disclosed income
- Design should avoid over insurance by:
- appropriate maximum benefit formula @ inception
- max replacement ratio
- stringent limitations for salaries in excess of limits
- overall max benefit level
- deductions for other benefits recieved eg state benefits
- Review benefit levels regularly
- clear policy conditions @ claim stage for overinsurance
- Training of staff to identify overinsurance
- Financial underwriting
- appropriate maximum benefit formula @ inception
- Manage expectations of PH at claim stage and robust design to avoid reduction of benefits or return of ‘extra’ premiums paid.
- Self-employed ==> salary fluctuatuons==> complex design
8
Q
What are the benefit definitions relating to timing?
WP 3 DP 3,4
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 PH knows they are sick
- Deffered period
- period of incapacity/sickness during which insurer 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 advantages
- integrate with employer-supplied benefits in the ST (regulation)
- reduce claim cost => reduce premiums
- reduce administration cost ==> reduce premiums
- reduce number of trivial claims eg claim for few days off for flu!
9
Q
What are the benefit definitions relating to timing?
LCP 2 ET 3
A
- Linked claims period
- waive deferred period if same sickness recurs within certain amoutn e.g. 26, or 52 weeks
- encourage work return
- Expiry age/term
- age at which benefits cease; often same as normal retirement age
- Policies written for exact duration usually 5+ years
- Premium paying period is defined
10
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
11
Q
What kind of claims definitions do we have for IP contracts?
Occupational
1,1,4,4,1,1,1,1,1
A
- Definition of incapacity needs to balance MCN and controllable insurance risk
- Most definition are occupational
-
Occupational based
- Effect of occupation on the price charged:
- IP rates depend on Occupation
- Divide occupations into classes. Least risky have the cheapest rates
- Based on claim exp and recovery time
- Classes vary between insurers
- Effect of occupation on the claim payment:
- inability to perform own occupation (very expensive/greatest level of cover)
- inability to perform own/reasonable occupation by education, status, training
- Inability to perform own occupation initially period of claim thereafter any occupation
- inability to perform any occupation
- Effect of occupation on the price charged:
- Cover on own occupation basis is prohibitive. Bad for insurer
- Cover on any occupation is unfair. bad for PH
- Hazardous Occupations usually offered cover on any occupation definition as it is less comprehensive and cheaper
- Exp claim cost highest for own occupation def and lowest for any occupation (less margin for disput @ claim stage)
- Claims paid on more generous basis than pricing monitored.
12
Q
What kind of claims definitions do we have for IP contracts? Alternative Incapacity
1,2,3,1
A
- Alternative incapacity criteria
- Occupational definition not suitable for those not in paid employment
- Claim events are defined in terms of inability to perform tasks
- activities of daily living ADL’s
- feeding, dressing, washing, toileting, mobility, transfer
- mental capacity (overides tests of physical incapacity
- functional assessment tests
- activities of daily working
- personal capability assessment
- activities of daily living ADL’s
- more strict than occupational definition eg 3/6 no benefit.
13
Q
Other IP policy conditions
2,3
A
- Occupational Changes
- Inform insurer of change in occupation
- Subjective and open to dispute if unable to carry out current occupation but can carry out a previous one
- Residence and location
- No allowance made for location of PH in country
- Risk does vary with location but insurer aims to balance risk . Concentrations incl in pricing.
- Availability of medical services.
14
Q
What kind of product variations are possible on IP contracts in terms of guarantees/reviewability of premiums 4 ?
3 6 1 1 2
A
- Guaranteed/renewable premium rates
-
full guarantee for full term of policy,
- level/ fixed increase/index
- requires substantial loadings (very long contracts, maybe high standard error for claims experience)
- higher reserves=> claims,exp inflation
-
Reviewable
- annual review @ review date
- premiums can be adjusted due to bad experience/ unforseen risks
- difficult to + prem initially mkt pressures=>lapses. restrict amt of + or cap it
- risk changes over time
* 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
-
Guarantee Term
- e.g guaranteed for first five years, with complete freedom review after
-
full guarantee for full term of policy,
-
Guaranteed insurability and options
- SA when life event occurs w/o U/w
-
No claims discount
- Prem if no IP claims
- method of rating policy with limited U/w
15
Q
Briefly discuss group IP contracts
General (8)
A
- General
- Employers legal obligation for sick pay during first 2 weeks
- 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)
