Ch 6: Critical illness insurance

Question 1

Describe a critical illness insurance contract

(def, 3)

(cust needs, 9)

(group, 7)

Answer 1

1. Product which provides 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. 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 repayment
   7. taxation planning
   8. buyout partner (keyperson cover)
3. Rather simple idea: pay lump sum, not meant to indemnify
4. Usually no surrender benefit or maturity benefit
5. Group version may exist
   
   1. employer offers as part of attractive remuneration package
   2. valuable to blue collar employees, if IP unavailable
   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)

Question 2

In addition to the core description of CI contracts, what other key features exist?

Form of contract (3)

Idea of cover given (2)

Complications which may arise (3)

Answer 2

1. 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.
2. Rather simple idea...
   
   1. pay lump sum which can’t be ‘taken back’ by insurer, unlike IP, where recovery leads to end of benefit payment
   2. not meant to indemnify- lump sum specified not related to claim event
3. ...complications arise
   
   1. different definitions for conditions btwn insurers in same market
   2. severe/strict requirements for conditions compared to layman’s understanding

Question 3

What characteristics are required for a condition to be deemed as ‘critical’, and hence seen as worthwhile being provided for via a CI contract?

(5)

Answer 3

1. Perceived as serious threat by public (lifestyle threatening)
2. Percieved to occur frequently by public (or not too rate that no public isn’t threatened)
3. Clearly definable
   
   • avoid ambiguity at claim,
   • prevent windfalls claims
4. Sufficient data to price
   
   • population-wide data
   • Difficult to predict future medical trends
5. Anti-selection can be avoided by the insurer
   
   • e.g with moratorium period (period during which claims aren’t allowed if underwriting suspected insufficient)

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

(7)

Answer 5

• These conditions make up majority of all CI claims

1. Cancer
2. Heart-attack
3. Stroke
4. Coronary artery bypass

• Also included the following of late
  
  1. kidney failure
  2. major organ transplant
  3. multiple scleroris
• These core conditions may be agreed inudstry wide

Question 6

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

(9 main, 5 small subpoints)

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)

(18…lol, this is a long list)

Answer 7

These additional conditions are usually included on the basis of competition/product differentiation in a competitive market.

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, and death would thus fall outside the term of the policy.
6. Usually present where death benefit already part of policy…
7. …where there are no death benefits, terminal illness benefit could add significant cost, and various causes would need to be investigated

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
2. …providing similar cover to insured’s children, usually until age 18 (when can cater for selves)
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. Such benefits often included as TPD complements CI cover…
2. …despite different nature of criteria for valid claim (can be significant overlap between TPD and CI
3. Definitions for permanent disability may be based on
   
   1. Occupation
   2. Related ADL; advantages over occupation based definitions
      
      1. less subjective than ability to perform occupation
      2. simplicity of using one definition throughout policy
      3. applied beyond retirement
      4. applied to wider range of lives,
   3. Working activities/functional abilities
4. Can be added for little cost <= because of overlap between CI, depends on
   
   1. definitions used
   2. conditions covered by CI
5. Different to IP which pays on temporary or permanent disability
6. Waiting period may be apply <= difficulty in establishing disability permanent

Question 11

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

(3)

Answer 11

1. Tierd 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. For one or more of conditions covered, pmt of benefit linked to severity/extent of illness/disease
   2. Features
      
      1. policy conditions need change, 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,
      3. Multiple claims possible, better policyholder satisfaction/retention
      4. Differentiate competitors
      5. Comparisons more difficutl => benefit insurer (lol)
   4. 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 (2)

in the context of CI contracts

Answer 13

1. Garantees/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
      • conflict with matching loss to benefit
2. New diseases/guaranteed insurability options
   
   1. Need to be properly costed
   2. May need advice from reinusers/other parties

Question 14

Discuss the risks to an insurance company that arise from standard non-tiered critical illness contracts (6)

Answer 14

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

1. Critical illness diagnosis rates
   
   • relatively limited info for this
2. Anti-selection, which can be reduced by
   
   • waiting period/moratorium period
   • medical underwriting
3. Selective withdrawals (even when offered as rider benefit)
4. Expense risk (mostly for standalone contracts)
5. Investment risk (usually small due to small reserves since it’s a term contract)
6. Financial risk due to surrenders on negative asset share

Question 15

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

(1,3)

(1,3)

(1,5)

Answer 15

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, cost time/money
      
      • because bringing forward claims increases importance of pre-existing conditions
   2. More claim forms/definitions
   3. Claim assessment judgement, 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)

Question 16

Comment on the capital requirements typically associated with CI insurance contracts

(4)

Answer 16

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