Chapter 1 Private Medical Insurance and related products

Question 1

Subject F102 covers various life/health insurance products.

When describing these products, there are key broad characteristics which should be known well. What are these characteristics?

(7 broad groups, with subpoints)

(Note, although this is covered in F102, it may be a useful framework with which to consider the products in F101)

Answer 1

1. Product features
   • description
   • conditions covered
   • benefits given (claim amount, etc)
   • presence of surrender/maturity values
2. Product forms
   
   • rider, standalone, accelerator
   • conventional, with profit, unit linked, index linked
3. Group vs individual
   
   • whether a group version of the contract exists or not
4. Customer needs met
   
   • savings, protection, accumulation
5. Additional special/unique product features
   
   • tiered benefits, children’s benefits
6. Risks to insurer
   
   • Investment, expenses, mortality, morbidity, persistency, selective lapses, anti-selection, moral hazard
   • Overall risks
     
     • financial: business, liquidity, credit, market
     • non-financial: operational, external
   • Aggregation/accumulation of risk
7. Capital requirements
   
   • initial expenses and new business strain
   • asset share and withdrawal risk compared to asset share

Question 2

Private Medical Insurance: product description + types of cover

What is PMI also known as? (1)

Define PMI (2)

Give a distinct feature of PMI contracts in the context of the RSA regarding who can /cannot provide indemnity cover (1)

Answer 2

PMI is

• …also known as Medical Aid…
• …is usually an indemnity-based product that seeks to provide compensation for the cost of private medical treatment.
• PMI refers to products that cover for medical expenses that would be funded by individuals or employers.
• In SA insurers are prevented from providing indemnity for health related benefits - only mutual funds can provide indemnity
• Renewable annually, premiums can be changed annually.
• Cover not guaranteed from one year to the next.

Question 3

Private Medical Insurance: product description + types of cover

Describe typical features of PMI products (5)

Answer 3

Typical features

• Short term
• Usually underwritten at outset, and not at renewals
• Renewable annually
• Reviwable premiums and terms (can be changed annually)
• Cover not guaranteed from one year to the next

Question 4

PMI customer needs met (5)

Answer 4

• helps protect against certain unexpected medical costs (either indemnity or in part), where the focus on on the following medical costs
  
  • hospital stay
  • medical supplies
  • medication
  • practitioner fees
  • medical treatment
• State healthcare
  
  • supplement State healthcare
  • alternative to State healthcare
• Receive better quality of care than currently receiving
  
  • from State
  • employer
• Peace of mind
  
  • for self
  • beneficaries (spouse, children, parents, other loved ones)
• Make use of tax benefits (if contributions are tax deductible)

Question 5

PMI: benefits provided

Describe the benefits provided by PMI products in terms of the cover options available/how extensive the cover might be (5)

Describe cover options/extent of cover in relation to prescribed minimum benefits (PMBs) (5)

In what way can PMI policyholders generally move between different ‘extents’/levels of cover offered by PMI products? (2)

Answer 5

In terms of extent of cover provided, PMI products may provide

• comprehensive cover or lower-cost benefits
• products may/often have limitations to certain spheres eg
  
  • hospitalisation, medication, consultation, optical, dental
  • exclusions

In RSA, there are minimum benefits prescribed by regulation for cover options; we refer to these as PMBs (prescribed minimum benefits and they include

• emergency medical treatment
• approx 270 listed medical conditions and their treatment
• diagnosis and treatment of approx 25 chronic conditions

Moving between cover options/levels of cover

• policyholders are usually allow movement to lower cost/comprehensive/extent/cover levels during a policy year
• but can only move to higher cost/comprehensive/extent/cover levels at the beginning of each policy year

Question 6

PMI: benefits provided

Describe the risk benefits (10 short points), under groupings of 3 main headings

Answer 6

Risk benefits covered by PMI includes the following

• Usually covers in-patient treatment covering both
  
  • diagnostic tests and,
  • operations
• In-patient stays
  
  • the room costs,
  • drugs,
  • dressings,
  • theatre fees,
  • specialists
• Outpatient treatment may be covered subject to benefit limits.

Question 7

PMI: benefits, medical savings account (MSA)

What do we mean by the concept of ‘medical savings account’ on PMI policies? (3)

Answer 7

Medical Savings Account (MSA)

• some PMI policies/options may offer a medical savings account
• the medical savings account is used by policyholders to effectively ‘self-fund’ costs of day-to-day medical expenses, such as
  
  • medication,
• depending on the rules of the PMI product, the MSA may be paid out on leaving the scheme (subject to a certain delay period)

Question 8

PMI: benefits, general exclusions

What kind of exclusions may be found on PMI products? (12)

Answer 8

Exclusions related to

1. chronic conditions
2. alcohol and drug abuse
3. self-inflicted injuries
4. cosmetic surgery (aka elective surgery)
5. frail care
6. infertility
7. experimental treatment
8. war risks
9. terrorism
10. crime/violation of law
11. search and rescue
12. costs for which 3rd party is responsible

Question 9

PMI: benefits, policy excess

What do we mean by a policy excess? (2)

What impact does the policy excess have on the premium payable for cover? (2)

Answer 9

Excess

• initial amount (‘layer’) of each claim payable by the insured, after which the policy will cover costs (subject to any maximums which may apply)
• the insured is, thus, liable for the first tranche of any claim (a pre-specified monetary amount known as the excess).

Impact of poliy excess on premiums payable for insurance/cover

• the premiums charged for cover increases as the level of excess reduces
• the premiums charged for cover reduces as the level of excess increases

Question 10

PMI: Claims experience and risk rating

What kind of costs feed into the claims experience on PMI products? (5)

What must the PMI provider consider when reviewing premiums in light of claims experience? (3)

Answer 10

Claims experience will comprise costs of treatment made up of various components such as:

• medical practitioner fees, medication, medical supplies and nr of days in hospital.

When reviewing premiums insurer needs to consider

• premium increases that will be tolerated by the market
• premiums should reflect changes in expected claims experience over period of cover.
• insurers may elect to rather introduce additional limits instead of introducing excessive premium increases

Question 11

PMI: Claims experience and risk rating

What do we mean by risk rating? (4)

Answer 11

• In the context of insurer’s deciding on the premium to charge a prospective policyholder….
• …risk rating refers to calculating the PH’s premium on the basis of various factors particular to that individual, including
  
  • risk of a claim occurring,
  • value of any such claims during policy term
• the risk is rated individually

Question 12

PMI: Claims experience and risk rating

What do we mean by community rating? (6)

In RSA, what factors can be used for community rating? (2)

Answer 12

Community rating

• Usually used in the context of health insurance (products)
• For insurer’s deciding on the premium to charge a prospective policyholder….
• …using community rating the PH’s premium are caclulated on the basis of various factors that are not particular to that individual
  
  • only group level information used to calculate premiums ie using risk factors applying to all persons in the group
  • the same premium is then charged to all members of the same group
• there is no underwriting at initial individual level, and no individual is refused insurance

In RSA, the only group level information which can be used to price premiums is

• income
• number of dependants

Question 13

PMI: Claims experience and risk rating

Compare the features risk rating vs community rating, in terms of either method’s impact on the insurer and the policyholder

Answer 13

Risk rating

Community rating

Features:

General impact

• Removes cross subsidies
• Subsidies are the biggest feature
  • young subsidise old
  • healthy subsidise sick

Features:

Impact on insurer

• insurer can cherry pick healthy risks + permanently exclude high risks
• insurer loses impact of cross subsidies
• more costly for insurer (to assess each individual risk)
• barrier to sales <= more ‘admin’ in sales process <= distribution channels may not like this
• only possible if a sufficient number of low risk policyholders are maintained
• carries additional risk to insurer
• greater body of policyholders can make risk more predictable

Features:

Impact on policyholder

• benefits healthy lives most, as they’ll likely gain from lower premiums/no loadings on standard rates
• less inclusive
• penalises unhealthy lives
• can lead to unaffordably high premiums, esp for poor risks
• more inclusive of all policyholders
• individuals in poor risk, relative to average risk, likely to gain most;
• conversely, healthier lives likely to ‘lose out’ most, as they end of paying more than they theoreticall should

Question 14

How can insurers manage claims costs on PMI products? (10)

Answer 14

• Limitations and exclusions on benefits where likelihood of moral hazard is high. eg purchasing designer spectables through PMI
  
  • can be differentiated for chronic conditions=> prevent depletion of benefits
• Co-payments and levies require a policyholder to pay a fixed proportion of cost of the healthcare services used => incentivises policyholders to only use what they need
• Medical savings accounts where policyholders are required to self-fund day-to-day medical expenses
• Wellness programmes that encourage healthy living and exercising by providing discounts may reduce claims costs.
• Preventative screenings detect illnesses early and thus higher chances of successful treatment.
• Approved provider networks where policyholders are encouraged to seek services from healthcare service providers who are registered with the insurer. Costs are managed through:
  
  • negotiating fees and service standards
  • introducing treatment protocols
  • requiring prior authorisation from insurer for hospitalisation
  • employing their own healthcare professionals to set rules and assess special cases
  • regularly reviewing utilisation to identify moral hazard and avoid unnecessary or more expensive treatment
• Managed care, which integrates the points discussed above

Question 15

PMI related products

List other products which are related to PMI (9)

Answer 15

1. Major medical expenses (UK)
2. Health cash plans
   
   1. Hospital cash plans
   2. Medical gap cover
3. Specified cover
   
   1. Dental plans
   2. Optical plans
   3. Excess plans
   4. Waiting list plans
4. Health benefits in travel insurance policies
5. Personal accident cover

Question 16

PMI related products: major medical expenses

Definition & features (2)

Benefit provided (5)

Answer 16

Definition

• Health insurance product providing a (potentially non-indemnifying) benefit when a policyholder undergoes a surgery
• Can be either long term, or short term

Benefit

• Benefit provided in the form of a fixed lump sum benefit
• Lump sum may vary with the severity of the case
• No guarantee the benefit will cover the in-patient costs from complications
• Does not cover out-patient episodes
• One big advantage is that this is a fixed benefit

Question 17

PMI related products: health cash plans

Definition (2)

Benefit (12)

What does the profitability of these products depend on? (3)

Answer 17

Definition

• Health insurance product which pays a defined benefit, depending on defined healthcare related events, for a defined premium

Benefit

• Subscriber is entitled to specified payouts dependant on occurance of certain healthcare related events:
  
  • hospitalisation,
  • gap cover,
  • dental,
  • optical,
  • maternity,
  • recuperation,
  • hearing aids,
  • consultation.
• The policy doesn’t indemnify the client, provides cash in hand
• Limits may apply eg payout is not more than 50% of client’s medical bill => form of copayment
• This reduces risk of anti-selection

Profitability of this type of product depends on

• long-term PH loyalty,
• cost effecient claims admin,
• volumes in force

Question 18

PMI related products: hospital cash plans

Definition (8)

Benefit (3)

Answer 18

Definition

• Health insurance product which pays a defined benefit, related to hospital costs incurred, for a defined premium
• Premiums are usually low
• Product often has limited underwriting
• Not renewed on an annual basis (like PMI products)
• In RSA, these products are provided by insurers, and risk rating is permitted
• Anti-selection may be reduced by
  
  • fact that fixed cash benefit is paid
  • waiting periods

Benefit

• Benefits are fixed and not intended to indemnify (this is the reason that individual risk rating is allowed)
• Fixed cash benefit is paid for each day spent in hospital
• Benefit usually paid from first or second day, provided a minimum amount of time is spent in hospital

Question 19

PMI related products: medical gap cover

Definition (6)

Benefits (3)

Answer 19

Definition

• health insurance product which covers the difference between
  
  • the cost of medical treatment and
  • the amount covered by conventional PMI products
• the difference between cost and amount covered by conventional PMI products arise due to
  
  • benefits limits or
  • doctors charging higher than what is covered by PMIs

Benefits

• benefits may be limited to annual amount per health event
• usually covers in hospital treatement and out-patient treatment for chemo, dialysis

Question 20

PMI related products: specified cover

Briefly describe what we mean by these contracts (2)

Give examples of such contracts (3)

Answer 20

These are insurance products give cover for specified health related events, and pay the provider of these health services directly ie the policyholder does not receive a benefit payment per se

Examples of specified cover

• Dental plans
• Optical plans
• Waiting list plans
  *

Question 21

PMI related prods: dental plans

Definition (2)

What do we mean by ‘capitation’? (5)

Benefit (1)

Answer 21

Definition

• dental plans are form of specified cover, where benefits are paid directly to the healthcare provider (not to insured)
• insurers usually work with dentists to screen for pre-existing conditions or imminent treatment

Capitation

• these products are usually agreed on a capitation basis
  
  • patient pays a regular fee to insurer
  • insurer pays a ‘fee per mouth insured’
  • insurer deducts an amount for its expenses from the regular policyholder premium, and passes remainder to dentist
  • the dentist bears the risk that treatment will cost more than premiums received

Benefits

• benefits are offered on an indemnity basis, where the insurer indemnifies the actual cost of treatment delivered

Question 22

PMI related prods: optical plans

Definition + benefits (7)

Answer 22

Definition

• Optical plans are form of specified cover, where benefits are paid directly to the healthcare provider (not to insured)
• Waiting periods and pre-existing condition exclusions may apply
• Product may be sold standalone, or as a rider

Benefits

• These provide cover for
  
  • spectacles,
  • eye-tests and
  • optical treatments

Question 23

PMI related products: excess plans

Definition (5)

Answer 23

Definition

• Excess plans are a form of health insurance available in scenarios where the insured is happy to meet lesser expenses, but wants insurance for big expenses
• Insured pays first tranche of a given claim, the balance is met by the insurer
• Leads to a lower premium
• There’s an incentive for the insured to seek public treatment to avoid paying
• Insured may have choice of excess

Question 24

PMI related products: waiting list plans

Definition (3)

Customer need met (1)

Answer 24

Definition

• Waiting list plans are form of specified cover, where benefits are paid directly to the healthcare provider (not to insured)
• This plan provides standard medical insurance benefits in circumstances where the public health service is not in a position to provide treatment within a specified period.
• If the insured can find public treatment in reasonabl timeframce and area, then insurer will not pay

Customer need met

• This meets the customer need where the desire to buy insurance is to avoid waiting for treatment, not for other reasons

Question 25

PMI related products : health benefits in travel insurance policies

Definition (3)

Premiums (6)

Benefits limitations (1)

Answer 25

Definition

• PMI often has limitations while out of country (of original issue)
• Travel insurance provides cover for medical care in foreign country until the insured is well enough to travel again ie emergency benefits only
• Medical evacuation and repatriation also covered
• Pre-existing conditions and hazardous activity are usually excluded

Premiums are risk rated, usually considering

• age, sex, destination, costs, length of trip, type of trip

Benefits

• Benefits limited to maximum amount per trip

Question 26

Personal accident cover

Definition (3)

What other products may personal accident cover be combined with? (3)

Briefly discuss the main risk factor(s) for personal accident cover (3)

Answer 26

Definition

• these policies provide lump sum benefits to compensate for bodily injury suffered as a result of an accident (eg loss of limbs)
• usually short-term, renewable policies
• policies usually have reduced rider benefits that provide cover for if the insured’s children suffer an accident

Often combined with

• Total temporary disability (TTD)
• Unemployment cover, for unemployment caused by
  
  • accident, sickness, unemployment (ASU)
• Mortage cover (sold through mortgage providers)

Main risk factor for personal accident cover is occupatio, hence

• age/gender not used
• it is often sold as group cover

Question 27

Personal accident: benefits

Discuss the benefits which may be payable on personal accident insurance products, or those covering accidental death and TPD (4)

Answer 27

• benefits are usually fixed amounts in the event that an insured (or family member) suffers an accident resulting in
  
  • loss of one or more limbs,
  • other specified injury
• this is not indemnity insurance because it is not possible to quantify value of the loss

Question 28

Personal accident: exposure measure

What do we mean by an exposure measure? (1)

What are the desirable traits of an exposure measure? (7)

For personal accident cover, what would be a good exposure measure? (4)

What about exposure measures on group policies? (2)

Answer 28

An exposure measure is a measure for the amount of risk taken on by an insurer.

An exposure measure should meet the following criteria:

• it should be a good measure for the amount of risk taken by insurer; allowing for both expected frequency and severity.
• it should be practical: objectively measurable, easy to collect, verifiable and not easy to manipulate.

Exposure measure for personal accident cover

• for PA person-year is the true measure of exposure
• cover is defined in relation to the level of cover normally required by one person
• there may not be other more suitable measures available, especially if family members are included (in which case, additional family is covered at standard rate, or average family size)

For group policies

• number of policies covered by any one policy may need to be adjusted so that premium is in line with risk
• policyholders can sometimes select more than one benefit unit

Question 29

Personal accident: claim characteristics

Briefly discuss the claim characteristics we’d normally associate with personal accident cover products (4)

Answer 29

• claims are usually reported and settled quickly without delay although there might be disputes
• claims can be very large
• claim frequency is reasonably stable.
• the claim cost is known in advance (given a fixed benefits amount is paid); this reduces the settlement delay

Question 30

Personal accident cover: risk and rating factor

What is a risk factors? (1)

What is a rating factor? (2)

Give examples of rating factors, and cover a nuance specific to group personal accident cover products (5)

Answer 30

Difference between a risk factor and rating factor

• Risk factors are factors that are known or suspected to affect claims cost
• A rating factor is used to determine premium; rating factors are proxies to risk factors

Examples of rating factors

• prime risk factor is occupation; as dangerous occupations will necessarily have a higher claim rate
• sum insured may be used as a rating factor
• premiums will often be independent of both age and gender
• group personal accident cover:
  
  • only age and industry may be known

Question 31

Accidental death and TPD: addition to personal accident cover

Definition/overview (2)

Discuss the key criteria for the benefit payable on accidental death and TPD (2)

Answer 31

Definition/overview

• Cover for accidents which lead to
  
  • …death or disability…
  • …is often included within personal accident cover

Key criteria

• the requirement for the cause of death or TPD to be due to an accident is an important criterion
• health-related events eg strokes are exclude

Question 32

TPD: definition

Discuss what we mean by a claim meeting the definition of “total permanent disability (TPD) “, and issues surrounding TPD (6)

Answer 32

TPD (total permanent disability) claims must meet the following criteria

• they must be total: major or substantial
• they must be permanent: beyond scope of recovery
  
  • this often brings about dispute
  • a deferred period is usually imposed after an event before a claim is paid
• if the insurer expects that recovery will eventually occur then they will not pay a benefit
• TPD complements personal accident insurance (despite different nature of criteria)

Question 33

TPD: definitions of disability

In what ways may disability be defined for insurance products providing cover for TPD? (4)

Answer 33

• Occupation based
• Related to activities of daily living
• Definitions using working activities or functional disabilities
• Alternative definitions

Question 34

TPD: disability definitions, occupation based definitions

Discuss how we define/establish disability using occupation based definitions (5)

What drawbacks might arise through using occupation based defitions for disability? (3)

Answer 34

Discuss occupation definitions

• Disability is established by inability to carry out an occupation
• This could be inability of the insured to perform:
  
  • any occupation
  • occupation they have experience for or trained for
  • their own occupation.
• When pricing for these three definitions it is important to allow for interpretation in pricing

Occupation-based definitions of disability may be criticized because they do not apply to

• housewives/househusbands
• those who are unemployed
• those in retirement age

Question 35

TPD: disability definitions, activities of daily living definitions

Discuss how we define/establish disability using activities of daily living definitions (5)

What benefits arise from using ADLs to establish disability? (3)

Answer 35

• Occupation based definitions for disabilities have drawbacks in terms of who they can be applied to
• Alternative criteria to pay the benefit is if the insured is unable to perform day-to-day tasks ie activities of daily living (ADLs)
• Definitions of these criteria are similar to those found under long-term care.
  
  • feeding, washing, toileting, mobility, dressing, transferring
  • using this basis to establish disability is also known as loss of independent existence

Benefits of using ADLs to establish disability

• It is less subjective than occupation based definition.
• It offers simplicity over the lifetime of policy.
• It can be applied to wider range of lives.

Question 36

TPD: disability definitions, alternative definitions

Discuss alternative definitions which may be used to determine disability in the context of contracts providing benefits under TPD (5)

Answer 36

• Activities of daily work (ADWs)
• Personal capacity tests
• Functional assessment tests; the activities include skills like
  
  • dexterity, mobility and communication
  • walking, getting up from a chair without assistance, walking up and down stairs, bending, kneeling, using hands

Question 37

Accident and Sickness insurance

Discuss these products briefly (1)

What kind of premiums can we expect on such products (2)

Briefly discuss the selling of these products on an individual/group basis (3)

Answer 37

• Personal accident cover can be combined with disability and unemployment cover (accident, sickness and unemployment (ASU)).
• Contracts usually have relatively low premiums compared to sum insureds, in view of low risk of claim.
• Products are sold on an individual basis as well as through employer-sponsored or affinity group schemes and may not be underwritten individually.