Ch 6: CI products

Question 1

Critical illness definition

Answer 1

• Benefit is typicaly a lump sum that is payable if the PH suffers one of the defined conditions
• Product may offer lump sum to be paid in installments, with any amount outstanding payable on death (if applicable) - this can help claimant to manage their finances better and reduce potential for fraudulent claims

Question 2

Three possible claim definitions under CI policy

Answer 2

• Upon happening of a critical illness event as defined in the contract terms
• On reaching defined degree of impairment (losing ability to walk)
• On undergoing a surgical procedure

Question 3

Three ways CI insurance can be provided

Answer 3

• Stand-alone policy: Benefit is paid on diagnosis of the insured condition, no beneft is paid on death
• When provided as a rider on a policy: sum assured relating to the critical illness is paid on diagnosis of insured condition and the sum assured amount relating to the death benefit is paid on the death of the life insured
• In case of an accelerated critical ilness benefit: the sum assured is paid on diagnosis of insured condition or death, whichever occurs first. May also only be part on diagnosis and the remainder at death.

Question 4

Surrender benefit for CI policy?

Answer 4

A critical illness pilicy is a pure protection product as it is not certain that the sum insured will be paid. Possible that the PH survives untill the end of the term with no benefits being paid. So just like a term assurance policy, there wil be no surender value at any time.

Question 5

6 Needs met by CI contract

Answer 5

• Income can be provided from the lump sum as an annuity when the individual cannot work as a result of their CI
• Benefit can be designed to repay a mortgage or other loan when the PH’s health is in question following diagnosis of CI
• Medical costs can be funded when the CI requires surgery or other expensive treatment
• Business partners can purchase CI policies on each other such that the benefits will fund the buyout of a stake in the partnership when CI arises
• A change in lifestyle can be funded where necessary to improve the claimant’s health - for example moving to a less stressful job following heart attack
• Other needs suggested include recuperation after illness, taxation planning, medical aids (for example intsallation of specialist equipment in home to enable claimant to remain in their home)

Question 6

Two aspects of CI contract which adds some simplicity to a health-related product

Answer 6

• Lump sum payout - cannot be withdrawn from insurer - some PHs are weary of insurers’ promises to look after them. (IP policy the benefits stop on recovery or reduce on partial recovery)
• Claim trigger of diagnosis or procedure is easy to explain and removes ambiguity over when benefits become payable.

Question 7

3 CI insurable condition characteristics

Answer 7

• Condition perceived by the public as being serious and to occur frequently (should at least be lifestyle threatening and not so rare that there is a negligible risk of occurance)
• Each condition covered can be defined clearly so there is no ambiguity at time of claim (inevitably medical terminology is used to structure benefits, is to insure benefits are only paid where the insured’s lifestye is changed in the longer term)
• Sufficient data are available to price the benefit

Question 8

Core conditons covered in SA CI

Answer 8

• Heart attack
• Cancer
• Stroke
• Coronary Artery By-pass Graft (CABG).

Question 9

ADLs (6)

Answer 9

• Feeding
• Dressing
• Washing
• Toiletting
• Mobility
• Transfer

Question 10

Reasons for offering tiered benefits in CI (5)

Answer 10

• CI product becomes more comprehensive; benefits are offered at levels of disease progression that would not have triggered payent under a more standard CI contract
• Payments (part or whole) more closely match the medical distress and financial need, reducing the incentive for anti-selection and for exaggeration of symptoms at claim stage
• Multiple claims are possible, which enhances PH satisfaction and retention
• As a variant from a standard product, allows insurer to differentiate itself from competitors
• Makes comparisons more difficult (and the insurer’s product potentially more profitable)

Question 11

8 common exlusions in long term disability insurance cover

Answer 11

• War, terrorism, civil unrest
• Pre-existing conditions
• Dangerous hobbies
• Self-inflicted injury / attempted suicide
• Criminal acts
• Experimental treatments
• Accident or emergency treatment
• Cosmetic surgery

Question 12

Reasons for exclusions (7)

Answer 12

• Manage anti-selection risk
• Simplify underwriting
• Reduce moral hazard - because of insurance people may be reckless in behaviour
• Some risks may have little to no data to be able to price
• Some risks may be difficult to price due to considerable uncertainties such as war/terrorism attacks
• To reduce costs (less claim payments and less administrative costs)
• May be poor practice or illegal to provide a particular benefit