Ch 6: Critical illness insurance

Question 1

Describe a critical illness insurance contract (6) 3,3,1,1,2,2

Answer 1

1. Benefit is a non-indemnifying lump sum on the occurance of events specified in contract terms, typically related to:
   
   • critical illness event
   • reaching defined level of impairment
   • undergoing surgical procedure
2. Form of the contract may be
   
   1. Standalone: benefit paid on CI event defined, no death benefit
   2. Rider: CI benefit payable both for CI event, and death benefit payable on death
   3. Accelerator: benefit payable on either CI event or death, whichever occurs first. Benefit may be paid in part for CI, and remainder on death.
3. Priced to cover claims where PH survives. Survival period condition.
4. Usually no surrender benefit or maturity benefit ==> protection product
5. CI Simplicity.
   
   1. pay lump sum which can’t be ‘taken back’ by insurer, unlike IP, where recovery leads to end of benefit payment
   2. policy wording is NB Lump sum simple, claims trigger event
6. .CI complexity
   
   1. different definitions for conditions btwn insurers in same market
   2. severe/strict requirements for conditions compared to layman’s understanding
7. W/o profits, UL

Question 2

How does CI Meet Customers needs?

(2) (1,8)

Answer 2

1. Protection benefit against risk of medical expenses due to CI
2. Customer needs met
   
   1. mainly protection
   2. fund medical costs
   3. fund lifestyle change (e.g. medical equipment installed at home)
   4. recouperate after CI event
   5. provide income from lump sum via annuity if can’t work after CI event
   6. loan/mortgage repayment
   7. taxation planning
   8. buyout partner (keyperson cover)

Question 3

What factors make a condition insurable on CI contracts?
(3)

3,2,8

Answer 3

• Percieved as serious and occur frequently (not too rare unknown)
  
  • Fear of illness create need for cover
  • Needs to severe enough to threaten lifestyle at min
  • Should not be be rare and risk should not be negligible if freq
• Condition can be defined clearly
  
  • Avoid ambiguity in definiton w/o medical jargon
  • Avoid claims being made for less severe conditions
• Sufficient data to price
  
  • For now and future ( incidence rates, mort)
  • Account for any future trends (advancements, large claims exp)
  • Anti-selection can be det from early claims
    
    • Caused by asym information (eg cancer stage)
    • Poor underwriting also main reason
    • Moratorium period
    • (period during which claims aren’t allowed if underwriting suspected insufficient)
    • eg no cancer claims paid out in period)

Question 4

What broad “categories” of conditions might be covered by a CI contract?

(5)

Answer 4

1. Core conditions (covering majority of all CI claims)
2. Additional conditions
3. Terminal illness conditions
4. Conditions influencing children
5. Total permanent disability

Question 5

Briefly list core conditions typically covered by CI contracts

(5)

1,1,1,7,1

Answer 5

• These conditions make up majority of all CI claims.
• Covered in full by a CI policy
• Claim definitions are industry standardized
• Examples
  
  1. Cancer
  2. Heart-attack
  3. Stroke
  4. Coronary artery bypass
  5. kidney failure
  6. major organ transplant
  7. multiple scleroris
• ADL’s often used to determine level of impairment

Question 6

What are the benefits of having core conditions for CI policies agreed industry wide?

(9 main, 1,2,1,1,1,1,1,2,1)

Answer 6

1. uses experience of many insurers
2. sharing of expertise, in interpreting
   
   • current medical conditions
   • future advances
3. shared costs of developing/maintining policy conditions
4. easier to collect comparable industry wide data
5. better information to assess risks
6. lower risk loadings => premiums
7. easier for prospective policyholder to understand
8. reduces ambiguity
   
   • hence, easier for sales staff to explain
   • hence, more sales in general
9. claims settled more quickly
   
   • fewer disputes, reduced expenses, reduced reputational threat

Question 7

Briefly list additional conditions which may be covered by CI contracts (i.e. in addition to core conditions)

(4)

1,2,1,18

Answer 7

• These additional conditions are included due to competition/differentiation
• Only increase cover minimally as
  
  • Ages covered have low incidence rates
  • LT benefits are already covered by perm disability at older ages
• Offer product restricted to high profile diseases only => less comprehensive but cheaper => increase sales

1. Alzeimer’s disease
2. AIDS/HIV (contracte by blood transfusion/occupation)
3. aorta graft surgery
4. benign brian tumour
5. blindness
6. coma
7. deafness
8. heart valve replacement/repair
9. loss of limbs
10. loss of speech
11. mortor neuron disease
12. paralysis/paraplegia
13. Parkinson’s disease
14. third degree burns
15. chronic emphysema
16. diabetes
17. pre-senile dementia
18. rheumatoid arthritis

Question 8

Discuss the conditions and benefits covered by CI contracts in relation to terminal illnesses

(7)

Answer 8

1. These conditions don’t relate to a specific CI disease..
2. …but rather the severity of a condition and its effect on life expectancy
3. Essentially accelerate the death benefit, thus additional cost is minimal
4. Can cease prior to end of term, e.g may not be paid 12 months prior to policy end…
5. …because terminal illness is seen as health state from which death would occur within 12 months.
6. Usually present where death benefit already part of policy…
7. …where there are no death benefits, terminal illness benefit could add significant cost as standalone

Question 9

Discuss the conditions and benefits covered by CI contracts in relation to children’s benefits (7)

Answer 9

1. Usually a rider benefit on a parents policy
2. …providing similar cover to insured’s children, usually until age 18 (term cover)
3. Claim from children doesn’t terminate policy…
4. ..only claim from insured policyholder terminates policy (different for tiered benefit, covered later)
5. Exclusions may be used, related to
   
   1. disabilities that could be caused intentionally (some parents would go to far means to extract benefit :( )
   2. pre-existing congenital effects
6. Cover may be limited to a certain % of insured’s cover
7. Cost is actually very low, compared to perceived benefit (because of low incidence rates in healthy kids!)

Question 10

Discuss the conditions and benefits covered by CI contracts in relation to total permanent disability (TPD)

(7)

Answer 10

1. TPD included as it complements CI cover…
2. …despite different nature of criteria for valid claim (CI usually leads to TPD, overlap of benefits)
3. Severity of disability is NB eg not temp disability =>IP product
4. IBNS reserve held during temp disability period.
5. Definitions for permanent disability may be based on
   
   1. Occupation
   2. Related ADL; advantages over occupation based defs
      
      1. less subjective than ability to perform occupation
      2. simplicity of using one definition throughout poliy
      3. applied beyond retirement
      4. applied to wider range of lives,
   3. Working activities/functional abilities
6. Can be added for little cost <= because of overlap between CI, depends on
   
   1. defnitions used
   2. conditions covered by CI
7. Different to IP which pays on temporary or permanent disability
8. Waiting period may be apply <= difficulty in establishing disablity permanence

Question 11

What additional variations to the product design may exist for CI contracts?

(3)

Answer 11

1. Tiered benefits
2. Guarantees/reviewability of premiums/benefits
3. New diseases/guaranteed insurability options

Question 12

Discuss tiered-benefits in the context of CI contracts

Definition (1)

Features (3)

Reasons offered (5)

Complexity (2)

Answer 12

1. Tiered benefits
   
   1. Proportional payment of benefit is linked to severity/extent of illness/disease
   2. Features
      
      1. policy conditions allow multiple claims, such that policy only terminates once 100% of benefit is paid
      2. further payments made from balance of benefit/sum assured
      3. levels/severity need to be clearly defined
   3. Reasons offered
      
      1. CI more comprehensive, benefit received at disease levels which would otherwise not receive under standard CI contract
      2. Pmts more closely match customer need, - incent for exagg symptoms
      3. Multiple claims possible, better policyholder satisfaction/retention
      4. Differentiate competitors
      5. Comparisons more difficult => benefit insurer (lol)
      6. Comes with complexity
         
         1. may reduce appeal
         2. higher claim disputes

Question 13

Discuss

• guarantees/reviewability of premiums/benefits (3)
• new diseases/guaranteed insurability options (4)

in the context of CI contracts

Answer 13

1. Guarantees/reviewability of premiums/benefits
   
   1. Uncertainty of various CI rates => significant enhancements to reserves
   2. Guarantees=> cover based on contract, as opposed to changing circumstances
      
      • may end up covering illnesses no longer critical over time
      • may end up covering less server incidences of illnesses than assumed in pricing
   3. Windfall claims may be incentivised
      
      • anti-selection
      • mismatching loss to benefit
2. New diseases/guaranteed insurability options
   
   1. Need to be properly costed
   2. May need advice from reinusers
   3. Market may move to extend/restrict cover
   4. GIO’s included

Question 14

Group CI

8

Answer 14

5. Group version may exist
   
   1. employer offers as part of attractive remuneration package
   2. valuable to blue collar employees, if IP unavailable,(incl TPD)
   3. requires clear definition of eligibility and benefits
   4. likely standalone
   5. usually short term, annually reveiwable, premiums may be shared
   6. may include multiple dependants
   7. free cover limits may apply (above which, underwriting needed)
   8. Trade unions,clubs,associations

Question 15

Discuss the risks to an insurance company that arise from standard non-tiered critical illness contracts (5)

Answer 15

In general we have the following risks for standard non-tiered CI contracts

1. Misest of Critical illness diagnosis rates
   
   • relatively limited info avail
   • Industry data for std definitions
   • Unexpected changes in rates
2. Anti-selection from selective withdrawals
   
   • waiting period/moratorium period
   • medical underwriting
3. Expense risk (mostly for standalone contracts)
4. Investment risk (usually small due to small reserves since it’s a term contract)
5. Financial risk due to surrenders on negative asset share

Question 16

Discuss the additional risks to an insurance company that arise from tiered critical illness contracts

(1,3)

(1,3)

(1,5)

1

Answer 16

Additionally for tiered-benefits, we have the following risks

1. Contract design
   
   1. difficult designing benefit levels/claim trigger levels
   2. ..legally and objectively
   3. …to prevent weak definitions which could actually lead to more claims than anticipated
2. Underwriting risk
   
   1. Need stringent initial underwriting pre-existing conditions, cost time/money
   2. More claim forms/definitions to manage when claims underwriting
   3. Claim assessment judgement training is NB, since less likely to have market consistent definitions
3. Pricing risk
   
   1. limited data, exacerbated by us splitting data into smaller groups
   2. changing critical illness diagnosis rates in future
   3. …leading to greater uncertainty => + margins => more expensive
   4. overlapping between illnesses
   5. cross correlation (greater potential for disallowed claims and customer dissatisfaction)
4. Reputational risk : judgement applied to claims=> bad press

Question 17

Comment on the capital requirements typically associated with CI insurance contracts

(4)

Answer 17

1. Cap req for stand-alone and marginal req for riders
2. Same order as IP
   
   • Expenses and commission will be of the same order
   • the supervisory requirements should be similar.
3. Adequate financial reserves
   
   • to cover late notification claims IBNR
   • can impose some sort of notification period e.g. only claims submitted within 2 years of qualifying event will be considered