Chapter 2: Critical illness insurance

Question 1

List thecriteria for the inclusion of an illness/conditionin acritical illnessproduct

Answer 1

condition/illnessperceived by the public to be serious and to occur frequently - if not life threatening, should at least be lifestyle threatening

condition/illnesscan be defined clearly so that there is no ambiguity at the time of the claim - evidence for a heart attack => enzyme changes in the blood

sufficient data available to price the benefit

anti-selection eliminated as far as possible (waiting periods, underwriting…)

Question 2

List major (“core”) conditions and non-major (“additional”) conditions in a CI context

Answer 2

Major:

heart attack
cancer
stroke
coronary artery by-pass graft

Non-major:

Alzheimer’s disease
motor neurone disease
Parkinson’s disease
blindness
deafness
loss of speech
loss of limbs
coma
third degree burns

Question 3

Discuss tiered benefits in CI policies

Answer 3

A proportion of the lump sum benefit is paid out, where the proportion depends on the the severity of the condition at the time of claiming

further claims are paid out from the remaining lump sum benefit when the condition worsens

The levels of severity (together with the respective proportions) will be clearly defined in the policy using objective medical definitions

Premiums do not reduce with any benefit payment. The policy will only terminate once 100% of the lump sum benefit has been paid out

Question 4

List advantages and disadvantages in offering tiered benefitsin CI policies

Answer 4

Advantages:

more comprehensive - benefits are paid out at different severity levelsof a condition that otherwise would not trigger a benefit payment in a standard CI policy
more closely matches medical and financial needs reducing incentive for anti-selection
considered more fair to policyholders
multiple claims are possible, whichincreases policyholder satisfaction and persistency
allows the insurer todifferentiate itself from its competitors

Disadvantages:

potential for higher number of claim disputes
significant cost and time may be needed to upgrade administration systems to handle more claims
data may be limited for pricing purposes
more effort to sell given complexity associated with claim definitions

Question 5

Describe children’s benefits in CI policies

Answer 5

cover can be added as a rider benefit, usually until they turn age 18

A claim in respect of a child will not terminate the policy

cost of adding this cover is usually small compared to its perceived value

Question 6

factors influencing CI claims

Answer 6

claim incidence rates:
preventative medicine programmes - reduction in claims,
screening programmes - increase in claims earlier than expected, changes in policyholder lifestyles - reduction in smokers reduces incidence of cancer

loose policy wording:
insurer at risk if claims criteria not sufficiently medically objective

level of underwriting at policy inception:
risk of anti-selection higher if not in line with market practice

state of the economy:
more fraudulent claims in a recession