Chapter 2 Critical Illness Insurance

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

CI: product description

What is CI insurance also known as? (4)

Give brief overall description of the CI product (3)

Answer 2

CI insurance is also known as

• dread disease cover
• serious illness insurance
• crisis cash
• living assurance

​

Overall description

• Insurance product which provides a non-indemnifying benefit on the occurance of events specified in contract terms, typically related to:
  
  • specified event, usually “critical illness” event
  • reaching defined level of impairment
  • undergoing surgical procedure​

Question 3

CI: product description

Presence of surrender benefit/maturity benefit (2)

Discuss the possiblity of group offerings for CI insurance polices (7)

Answer 3

Presence of surrender benefit/maturity benefit

• Usually no surrender benefit or maturity benefit for this type of contract
• Premiums, hence reserves, are usually too low to build up sufficient asset share to offer an adequate surrender benefit/maturity benefit

Group versions may exist

• employer offers as part of attractive remuneration package
• valuable to blue collar employees, if IP unavailable
• requires clear definition of eligibility and benefits
• likely standalone
• usually short term, annually reveiwable, premiums may be shared
• may include multiple dependants
• free cover limits may apply (above which, underwriting needed)

Question 4

Describe a critical illness insurance contract in terms of the customer needs met

Answer 4

Customer needs met are mainly for protection, and no saving (as is evidenced by the lack of surrender value/maturity value as well)

• fund medical costs
• fund lifestyle change (e.g. medical equipment installed at home)
• recouperate after CI event
• provide income from lump sum via annuity if affected policyholder can’t work after CI event
• loan repayment
• taxation planning
• buyout partner (keyperson cover)

Question 5

What is the benefit under a critical illness policy? (3)

Answer 5

• The benefit is typically a lump sum to be paid in installments with any outstanding amount payable on death if applicable.
• Alternatively, the lump sum may be used to buy a living annuity from date of valid claim.
• Payment of the benefit may be subject to a survival period (14-28 days)
• The benefit payable is usually specified as an amount in the contract terms, hence is non-indemnifying, and is usually independant of the insured event (certain exeptions exist, eg tiered benefits)

Question 6

In what forms may a CI insurance product be provided, in relation to its addition, or not, to other products? (3)

Answer 6

• Stand-alone benefit
• Rider benefit
• Accelerator benefit

Question 7

Discuss the following forms through which CI products may be sold in terms of its addition to other products, or not:

Standalone (3)

Rider (5)

Accelerator (3)

Answer 7

Stand-alone

• the sum insured is paid on diagnosis of the insured condition
• not added to any other product
• only 1 benefit/claim amount paid

Rider

• where a benefit is paid relating to diagnosis of insured condition and on death of the life insured
• essentially ‘added’ onto another product
• number of benefit payments/claims payable depends on contingent event
  
  • if CI event first, then death later=> 2 benefit payments
  • if death first (due to event not covered by CI policy), then only 1 benefit payment

Accelerator

• benefit is accelerated in terms of critical benefits on term or whole life assurance policies
• part of the sum insured is paid upon diagnosis of illness and remainder upon death of the insured
• only 1 benefit payment/claim amount paid

In summary:

• standalone benefit payment: only diagnosis
• rider benefit payment: diagnosis and death, assuming diagnosis first
• accelerator benefit payment: diagnosis or death, maybe both

Question 8

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 8

1. Perceived as serious threat by public (lifestyle threatening)
2. Percieved to occur frequently by public (or not too lowe a requency/occurence rate that public isn’t threatened)
3. Clearly definable
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 9

CI characteristic: perceived to be serious and frequent

CI conditions must be

• perceived as serious threat by public (lifestyle threatening)
• percieved to occur frequently by public (or not too rate that no public isn’t threatened)

Briefly discuss this requirement (4)

Answer 9

• There are some diseases which are feared even though they have a very low incidence of occurrence.
  
  • insurers include these in cover because there is a market to sell cover for these.
  • to be include a disease if not life threatening it should at least be lifestyle threatening.
• A condition/disease shouldn’t be so rare that there is a negligible risk of occurrence, or else it offers no perceived customer value

Question 10

CI: conditions covered, characteristics of CI, clearly defined conditions

CI conditions must be clearly defined.

Briefly discuss this requirement (6)

Answer 10

• conditions must be clearly definable so as to
  
  • avoid ambiguity at claim
  • prevent windfall claims
• avoiding ambiguity in the definitions is not easy
  
  • this is usually due to nature of benefit structure being based on complex medical terminology.
  • eg heart attack diagnosis maybe based on changes in the levels of enzymes in the blood, to show the extent of the condition

Question 11

CI: conditions covered, characteristics of CI, sufficient data

CI conditions must have sufficient data available to price said condition.

Briefly discuss this requirement (2)

Answer 11

• Any critical illness condition that is available as a benefit should be capable of being priced both now and in the future as accurately possible.
• The requirement to predict future trends is onerous, since from date which cover is extended to a new condition it takes some time to build up data.

Question 12

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

(5)

Answer 12

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

• Note
  
  • split between what is ‘core’ and ‘additional’ may change from time to time
  • in some markets the concept of core and additional have been superseded by use of limited number of core conditions.
  • some markets have standardized/industry-wide-agreed claim definitions for many of the diseases.

Question 13

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

(9 main, 5 small subpoints)

Answer 13

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 14

Briefly list core conditions typically covered by CI contracts

(7)

Answer 14

• 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
• The above conditions account for the makority of CI events in most industries
• These core conditions may be agreed inudstry wide

Question 15

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 15

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 16

CI: conditions covered, terminal illness

Discuss the conditions and benefits covered by CI contracts in relation to terminal illnesses (7)

Comment on the customer value of including terminal illness (2)

Answer 16

• These conditions don’t relate to a specific CI disease.
• …but rather the severity of a condition and its (servere) effect on life expectancy eg death expected within a 12 month period.
• Essentially accelerates the death benefit (ie brings forward the payment of the death benefit), thus additional cost is minimal
• For fixed term policies, offering cover for TPD events can cease/usually ceases prior to end of term, e.g may not be paid 12-24 months prior to policy end…
• …because terminal illness is seen as health state from which death would occur within 12 months, and death (for which we were accelerating the benefit payment on CI event) would have fallen outside the term of the policy.
• Terminal illness does not fit as a stand-alone critical illness plan where a death benefit is not payable, because adding it would be an “actual extra cost” (unlike is the case where we are accelerating a death benefit on a policy which already covers death)
• Percieved customer value
  
  • Covering terminal illness ensures all conditions that reduce life expectancy are covered.
  • Perceived customer value worth the minimal additional cost

Question 17

CI: conditions covered, children’s benefit

Discuss the conditions and benefits covered by CI contracts in relation to children’s benefits (8)

Comment on the percieved customer value gained by providing children’s benefits on CI policies (1)

Answer 17

• Usually a rider benefit
• …providing similar cover as the insured to the insured’s children, usually until age 18 (when can cater for selves)
• Cover may be limited to a certain % of insured’s cover
• Claim from children doesn’t terminate policy…
• ..only claim from insured policyholder terminates policy (different for tiered benefit, covered later)
• Exclusions may be applicable/used, related to
  
  • disabilities that could be caused intentionally (some parents would go to far means to extract benefit :( )
  • pre-existing congenital effects
• Percieved customer value
  
  • cost is actually very low, compared to perceived benefit (because of low incidence rates of terminal illness in healthy kids…in RSA, children’s deaths normally caused by AIDS, accidents)

Question 18

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

(7)

Answer 18

1. Such benefits often included as part of CI cover, since 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 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
4. Can be added for little cost <= because of overlap between CI, depends on
   
   1. defnitions 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 establishin disablity permanent

Question 19

Discuss tiered-benefits in the context of CI contracts

Definition (1)

Features (4)

Complexity (2)

Answer 19

• This is a variant to the standard CI policy in which for the one or more of the conditions/illnesses covered, the payment of sum insured is linked to the severity/progress of the disease/condition at time claim is made.
• Features
  
  • further payments made from balance of benefit/sum assured
  • premiums do not reduce with any proportionate payment
  • policy conditions need to change, such that policy only terminates once 100% of benefit is paid
  • levels/severity need to be clearly defined in the policy documents using objective medical definitions
• Comes with added complexity
  
  • may reduce appeal to customers
  • higher likelyhood of claim disputes

Question 20

CI: conditions covered, tiered benefits, reasons for offering

Discuss the reasons an insurer may offer tiered benefits to its customers (8)

Answer 20

• CI insurance becomes more comprehensive. It pays benefits that wouldn’t be paid under a standard CI insurance contract.
• The payments, whole or partial, are more closely matched with the policyholder financial need.
  
  • This reduces incentive for anti selection and thus exaggeration symptoms at claims stage.
• Multiple claims are possible which enhances
  
  • customer satisfaction and
  • retention
• As a variant on the standard product it also permits the insurer to differentiate itself from it competitors.
• It makes it difficult to do comparison (making the insurer’s product potentially more profitable due to higher profit loadings it can include)

Question 21

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

Answer 21

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 22

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

(1,3)

(1,3)

(1,5)

Answer 22

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 23

Comment on the capital requirements typically associated with CI insurance contracts

(4)

Answer 23

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