Ch 5: IP products

Question 1

Income protection aim

Answer 1

• Replace part of the income that the insured life would have earned if they become unable to work due to accident or illness.
• Pays a benefit in the form of a regular income.

Question 2

When is an IP benefit paid? (Including exclusions)

Answer 2

• Insured event is described as the inability of the insured life to work (incapacity) through illness or accident.
• Policy document needs to define carefully the situation that needs to exist before the benefit becomes payable, and under what circumstances it wil cease.
• Unemployment, redundancy, early retirement and reluctance to return to work should not be covered, and not all types of illness will be covered (eg HIV, attempted suicide).
• Usually written as long-term policy under which a number of seperate periods of benefit payment can occur, whothout the policy ceasing.

Question 3

Surrender values for IP products?

Answer 3

• Policy conditions usually state explicitly that the policy will not have a value on surrender or maturity.
• This is because the sum at risk under an IP policy is very large compared to the regular premium, so once expenses and expected claims are taken into account, there is little surplus left to build up much of an asset share.

Question 4

Main customer needs addressed by IP insurance

Answer 4

• Replacement income when the PH is unable to continue in their own (or possibly any) occupation, and cannot earn an income.
• Income stream designed to match the PH’s monthly loan servicing costs or any other costs like premium payments on life contracts
• Locum Protection insurance - disability of a partner in a professional practice may severely impact the fee stream into the partnership. Professionals purchase a form of IP on each other. Benefit covers the salary and other employment costs of a temporary replacement, so that the practice can continue to provide services to all.

Question 5

Three groups who perceive the greatest need for IP are:

Answer 5

• Employer who is keen to pass financial responsibility for sick employees to an insurer after limited period of invalidity.
• Self-employed person who does not have the comfort of an employer-sponsored scheme.
• Individuals who do not have provision through their employer.

Question 6

Policy conditions should aim to:

Answer 6

• Reflect true intentions of the office
• Give some cushion against adverse events over which the office has no control
• Be as far as possible, simple and unambiguous, so as to assist the sales, underwriting and sale processes

Question 7

Benefit conditions that need to be defined for IP contract

Answer 7

• Replacement ratios
  * Usually defined as the ratio of post-claim income to pre-claim inicome net of taxes.
  * Level of replacement ratio is seen as a critical indicator of likely claim experience. The higher the ratio the lower the incentive to return to work, and the worse the morbidity experience is likely to be.
  * May incentivise return to work with rehabilitation benefits
• Escalating benefits
  * Benefits may be increasing in line woth some index subject to a maximum.
  * Benefits may increase at different rates in and out of claim
  *
• Proportionate or rehabilitation benefits
  * Products may provide a rehabilitation or proportional benefit to those who return to work on a part-time or les strenuos and lower paid role.
  * May also provide cash to finance treatment needs, counselling and advice
• Waiver of premium benefit
  * Most policies will include the condition that premiums are waived during periods when the benefit is payable. Usually charged for by a small percentage addition to the premium rate.

Question 8

Main reasons to include a deffered period are:

Answer 8

• Integrate with employer/state supplied benefits
• Reduce costs of claims to insurer (and therefore premium)
• Reduce insurer’s admin costs (and therefore premium)
• Meet true customer needs, most customers would not want to submit a claim for a couple days off with flu

Question 9

Linked-claims period definition

Answer 9

• Way in which insurers encourage a return to work when claiming is to waive the deferred period if sickness recurs within say 26 to 52 weeks.
• Without this, PH may delay returning to work until certain they will not fall sick again, since they will have to complete another deferred period before benefits are paid.

Question 10

Claim definitions for IP overview

Answer 10

• The definition of disability must be a balance between the desire to meet the needs of genuine claimants and the desire to have controllable insurance risk
• Difficult to find objective criteria to determine eligibility under the definition of incapacity.
• Inability to continue in one’s occupation may be difficult to assess, whereas alternative capacity criteria like the failure of activities of daily living, may be deemed an objective test of incapacity.

Question 11

Occupation affects IP product design in two ways:

Answer 11

The price charged:
* Most occupations divided into 4 or 5 classes, the cheapest rates are then applied to the least risky class, with other classes usually being a flat multiple of these.
* The catagorisation of occupation is related to claims experience

The claim payment
* Occupational definitions relate to being able to carry out an occupation

Question 12

Why some occupations have worse claim experience than others

IP

Answer 12

• Claims experience is related to the number of sickness inceptions and also the length of the periods of sickness.
• Some occupations have an obvious physical danger
• Others may seem healthy but experience absence due for example to mental illness
• Some occupations require complete recovery befre the insured can start working again (pilot health tests …)
• Some occupations attract healthy lives (a pilot has to pass a series of medical exams)

Question 13

Overinsurance in IP. What is it, how does it arise and what can be done?

Answer 13

• Over-insurance
  * Refers to higher than appropriate replacement ratio.
  * ways it can arise:
  * over-insurance from outset
  * Subsequent over-insurance, through salary not keeping up with benefits
  * Reduction in tax levied on IP claims
  * Multiple policies or receipt of non-disclosed sources of income (while sick)
  * Ways of addressing the issue:
  * Appropriate maximum benefit formula at point of sale (incorporate max ratio, overall max benefit limit, deductions for any other benefits like state benefits and more stringent limitations for higher salaries in excess of specified limits)
  * Quality training of those conducting the sale
  * Regular reviews to ensure the level of benefit remains appropriate
  * Clear policy conditions highlighting the likely action at the caims stage in event of over-insurance