CH 6 (WM)

Question 1

Explain the importance of customer attraction and clarity. [1.25]

Answer 1

• A product may be attractive if offers an opportunity to provide protection against a risk that is currently a worry✓✓ at a reasonable price✓.
• The product may be unattractive if it meets this need but is hard to understand✓✓.

Question 2

List the five main factors relating to product design affecting level of customer attraction. [1.75]

Answer 2

• meeting specific needs ✓
• providing cash ✓
• providing peace of mind ✓
• simplicity and clarity ✓✓
• guaranteed vs reviewable premiums and benefits ✓✓

Question 3

List the 4 specific needs met by Health and care insurance products. [2]

Answer 3

• Finance medical treatment bills.✓✓
• Provide funds to finance costs of lifestyle adjustments following a critcal illness.✓✓
• Health insurance can finance the cost of care in old age.✓✓
• Can provide a lump sum to repay loans.✓✓

Question 4

State the primary interests of customers in the design of HC products. [2]

Answer 4

Their primary interests are to have products that:
* meet their needs✓✓,
* are clear in purpose✓,
* have an appropriate charging structure✓✓ (eg guarantees and options)✓✓,
* and are affordable✓.

Question 5

Describe the merits of cash benefit payments to the policyholder. [1.75]

Answer 5

Cash gives the policyholder choice✓, both in terms of:
* the level of benefit ✓
* the use of the benefit✓.

However, this choice may not be positive if the policyholder makes a poor choice.✓✓

An advantage of indemnity benefits is that the insurer may be able to obtain cheaper prices from healthcare providers due to the volume of business given to providers.✓✓

Question 6

Describe the nature, cash vs indemnity, of the benefits offered under a PMI policy. [2]

Answer 6

Policies are normally written on an indemnity basis✓✓, although there may be a cap on the benefits paid for certain procedures✓✓. The insurer usually pays the provider of treatment directly.✓✓
Exceptions to this include cash benefits that are paid when a State alternative is used✓ and health cash plans, which provide cash benefits.✓

Question 7

Describe the nature, cash vs indemnity, of the benefits offered under a CI policy. [2.25]

Answer 7

CI insurance –
The lump sum cash benefit is not related to the actual loss incurred by the insured✓✓ and it can be used for any purpose✓.
Benefits can be more than the cost of immediate care✓✓; the surplus may be used for recuperation / rehabilitation.✓✓
Sometimes the benefit is a genuine windfall to the policyholder (which can cause anti-selection)✓✓.

Question 8

Describe the nature, cash vs indemnity, of the benefits offered under a LTCI policy and the main risks to the insurer under their preferred benefit approach. [1.5]

Answer 8

LTCI –
While consumers may prefer indemnity benefits✓, insurers have found it increasingly difficult to assess these risks✓ and prefer to offer products with cash benefits✓.
In this case, the main risks to the insurer✓ are the longevity (annuity) risk✓ and the risk of benefit inflation being greater than expected✓.

Question 9

Describe the peace of mind offered by HC products. [1]

Answer 9

For many individuals there is a positive psychological effect✓ of knowing they are protected✓ should they suffer incapacity or sickness✓✓.

Question 10

Describe the term micro insurance. [2]

Answer 10

• Microinsurance in insurance that is targeted towards those who are working but with low incomes.✓✓
• It should be designed to meet needs with greater emphasis on covering basic components and affordability.✓✓
• Limited benefits for low premiums.✓✓
• Microinsurance is particularly important for the developing world.✓✓

Question 11

Describe the main concerns PHs have about private medical treatments. [0.5]

Answer 11

PMI – The main concerns are that the costs of treatment are unaffordable or that the quality of State provision is inadequate.✓✓

Question 12

Describe the main concerns PHs have about critical illnesses. [0.5]

Answer 12

CI insurance – The main concern is being diagnosed with certain headline diseases or the need to undergo serious surgical procedures✓✓.

Question 13

Describe the main concerns PHs have w.r.t. LT care. [1]

Answer 13

LTCI – The main concerns are having insufficient funds to pay for care in old age and that care available from the State (or informally) is inadequate.✓✓
The concern may also come from a family member or friend.✓✓

Question 14

Outline the simplicity and clarity offered by PMI products. [5]

Answer 14

PMI – The concept is clear✓, but policy conditions can complicate the product✓ and lead to misunderstandings by policyholders✓.

In particular:
* the underwriting and acceptance processes can be misunderstood ✓✓
* there may be limits on the benefits ✓ (eg excesses and upper limits) ✓✓
* there may be exclusions ✓ (eg for pre-existing and non-acute conditions) ✓✓
* certain treatment may be excluded✓, eg cosmetic surgery, infertility, frail care and experimental treatment [1]
* there may be complicated arrangements for sharing the risk between the policyholder and the insurer ✓✓
* claims may be required to be pre-authorised ✓✓
* the choice of hospitals or other establishments in which treatment can be provided may be restricted.✓✓

Question 15

Outline the simplicity and clarity offered by CI products. [4]

Answer 15

CI insurance – These policies appeal to consumers✓ as they are simple to understand✓.
Two aspects of simplicity✓
* lump sum payout - cannot be subsequently withdrawn by insurer.✓✓
* claims trigger of diagnosis is easy to explain.✓✓

However confusion✓ can arise due to exclusions✓,
point-of-claim underwriting✓ and non-standard claim definitions✓.
Tiered benefits CI:
* is more complex than a standard CI contract✓✓, making it hard to compare✓
* has potential for a higher degree of claims dispute✓✓.

Question 16

Outline the simplicity and clarity offered by LTCI products. [2.75]

Answer 16

LTCI –
While the concept is straightforward✓, confusion✓ may arise over the extent of the benefits✓.
* Cash benefits may not meet the costs of care✓✓,
* and may be subject to maximum amounts or payment period✓✓.

These conditions complicate matters for a non-expert purchaser.✓

Also, trigger events are usually defined in terms of ADLs✓✓, which need to be explained to an applicant✓.

Question 17

Describe the guarantees and reviewability of premiums and benefits under a PMI contract. [1.5]

Answer 17

PMI is short term✓ and usually annually renewable✓, and so premiums and sometimes T&Cs can be changed each year✓✓.

Premiums may be guaranteed for 3 - 5 years, when medical inflation is stable.✓✓

Question 18

Describe the guarantees and reviewability of premiums and benefits under a CI contract. [2]

Answer 18

What are serious illnesses✓, and how they are treated✓, changes rapidly with medical advances✓.
This has made it difficult for insurers to assess the risks they face.✓✓
This uncertainty makes reviewable premiums more suitable✓, however, competitive pressures✓ have led to guaranteed premiums business being sold✓.

Question 19

Describe the guarantees and reviewability of premiums and benefits under a LTCI contract. [2.75]

Answer 19

Immediate needs✓
- Present no problems of guaranteed premiums✓✓.
- Income stream is brought by single premium✓.
- Income stream may move based on increasing disability✓.

-Pre-funded LTCI✓
-Reviewable products dominate✓✓.
-degree of premium variation depends on past &
future expected claims experience✓✓.
-& estimated trends to which the policy is linked✓.

Question 20

Define Keyperson cover. [2.5]

Answer 20

Keyperson products are taken out by an employer to cover key employees.✓✓
They fall into two categories✓:

• Those designed to provide compensation for loss of profits✓✓.
• Those designed to cover the key employee’s salary✓✓ (to facilitate the temporary recruitment of a replacement)✓.

The insurance should cover sickness, incapacity or death of the key employee✓✓.

Question 21

In what sense could you argue that PMI is more focused than CI? [2]

Answer 21

CI pays a cash sum✓ on the occurrence of one of the serious conditions listed in the policy✓, irrespective of the actual loss suffered by the insured✓.
PMI is an indemnity product✓ that pays for the actual medical treatment expenses incurred✓ as a result of sickness or injury✓. The size of the payment is related to the actual loss✓, and so it is more focused✓.

Question 22

Notes Q 6.4
Discuss how PMI cover might meet the medical needs in old age. [3]

Q6.4

Answer 22

Solution 6.4
PMI cover will provide cover for treatment of chronic conditions✓ (eg diabetes medication)✓ as well as acute conditions✓ (eg surgery and recuperation)✓✓.
However it should be noted that extended recuperation benefits may not be available commercially✓✓.

Frail care✓ or nursing assistance✓ that involves activities of daily living✓ (sometimes referred to as “custodial care”)✓ will not be covered under PMI policies✓.

This is a DISCUSS question.

Question 23

Describe two major health care risks that are not covered by CI insurance. [1.75]

Answer 23

• the result of serious accidents✓✓ (eg injuries following a car accident)✓, unless these result in permanent disablement✓
• psychiatric and similar illnesses✓ (eg stress)✓, unless these result in permanent disablement.✓

Hanna and Gabs

Question 24

Notes Q6.5
What risks are the insurer exposed to if indemnity benefits are provided?
Name three ways in which the insurer can reduce these risks. [4]

Answer 24

The insurer is exposed to fraud✓ and moral hazard✓, where policyholders claim for more expensive benefits than necessary✓.
The insurer can reduce this risk by:
* introducing co-payments✓, particularly in the form of a percentage of the claim✓ so that the policyholder is responsible for part of the claim amount✓
* setting limits to the maximum amount✓ that can be claimed annually✓ for a certain condition✓, or in total for the PMI cover✓
* excluding treatment✓ where there is a greater propensity✓ for consumers to demand✓ or healthcare providers to supply✓ more expensive treatment✓ (eg excluding caesarean sections✓ except in emergencies under maternity benefits✓).

Question 25

Notes Q6.6
Outline the key differences between the cover provided by a PMI and a hospital cash or other health cash plan. [3.5]

Answer 25

A PMI policy is an indemnity policy✓. Hospital cash and other health cash plans are not indemnity policies, but pay fixed cash benefits✓.
The policyholder must incur costs to claim benefits under a PMI policy✓✓.
Provided the insured is hospitalised✓ or the event insured in the health cash plan has occurred,✓ the plan will pay benefits whether or not the insured has suffered any loss✓, and without reference to the costs incurred✓.
A PMI policy will cover a number or specified medical treatments✓ whereas the hospital cash plan will only pay for hospitalisation✓ and health cash plans will only pay for the specific treatment✓ (eg spectacles✓).
Hospital cash and other health cash plans usually have lower premiums✓ and have simpler benefit structures✓.

Question 26

Notes Q6.7
Suggest how the terms and conditions of a CI policy might be amended so that the same range of illnesses and procedures were covered, but the problems around “windfall” payments are avoided. [0.75]

Answer 26

The policy could recognise that not all serious injuries and illnesses✓ are equally severe✓ and offer a tiered benefit CI product✓.

Question 27

Notes Q6.8
“Cash or care” is a continuing debate among those designing insurance products.
For a pre-funded LTCI policy suggest, giving reasons for your choice, which form of benefits is best from the point of view of:

(i) the insurer. [7]

Answer 27

The insurer is likely to prefer cash benefits.✓✓
LTCI events will usually not happen for a considerable time.✓✓ This makes the estimation of the probability of their happening and the claim size when they do happen very difficult.✓✓
The type of illnesses that are prevalent in the future✓ and how these illnesses are treated✓ will influence the probability of needing long-term care✓. For example, Alzheimer’s disease✓ occurs relatively frequently at the moment✓ and is likely to require expensive care✓. However, advances in medical and related technologies in the future may see the disease prevented✓✓ or alternative✓, less expensive ways✓ of providing care for those with cognitive impairmen✓ may be developed.
There may be other diseases as yet unknown that will present similar problems in the future to those presented by Alzheimer’s disease today.✓✓

A cash benefit only requires the insurer to estimate the probability of a claim.✓✓ This presents fewer problems than also having to estimate the claim size✓✓.

Premiums for care policies would be very high compared to premiums for cash policies✓✓ (because of the substantial contingency loadings needed for care policies)✓, and so they may be more difficult to sell✓.

Policies with care benefits will require larger reserves✓✓. This may cause problems if the insurer has to find additional capital✓ should the experience turn out to be much worse than that assumed in the premium basis✓.

Question 28

Notes Q6.8
“Cash or care” is a continuing debate among those designing insurance products.
For a pre-funded LTCI policy suggest, giving reasons for your choice, which form of benefits is best from the point of view of:

(ii) the insured.

Answer 28

The insured is likely to prefer care benefits.
By buying a care policy the insured will achieve his or her aim of removing the risk of having to pay for care throughout their life. A cash policy has the residual risk that the cash available will be insufficient to pay for the care they would like.
However, the premiums for care policies are likely to be much higher than those for cash policies, so the insured may opt for a cash policy, particularly if the insurer offers a “free” advice service for the purchase of care.