Chapter 2 Critical Illness Insurance

Question 1

What are the other names for Critical illness cover ?

Answer 1

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

Question 2

What is the benefit under a critical illness policy?

Answer 2

• 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.

Question 3

Critical illness may be considered a hybrid benefit payable in the following ways:

Answer 3

• upon happening of an event regardless of the extent.
• on reaching a defined of impairment eg losing ability to walk unaided
• on undergoing a surgical procedure eg heart transplant
• the policy doesn’t indemnify policyholder
• cover is not designed to cover medical costs incurred.

Question 4

A critical illness can be provided as:

Answer 4

• a stand-alone, the suminsured is paid on diagnosis of the insured condition.
• as a rider benefit, where a benefit is paid relating to diagnosis of insured condition and on death of the life insured.
• 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.

Question 5

Characteristics of conditions insured under critical illness products(3):

Answer 5

• the conditions is perceived to occur quite frequently and it is serious.
• the condition covered can be clearly defined so that at time of claim there is no ambiguity.
• there is sufficient data available to price benefit.

Question 6

CI characteristic: Perceived to be serious and frequent:

Answer 6

• 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 included a disease if not life threatening it should at least be lifestyle threatening.
• it shouldn’t be so rare that there is a negligible risk of occurrence.

Question 7

CI conditions characteristic: clearly defined conditions

Answer 7

• 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 diagonals maybe based on changes in the levels of enzymes in the blood, to show the extent of the condition.

Question 8

CI conditions characteristic: Sufficient data

Answer 8

• 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.
• from date which cover is extended to a new condition it takes some time to build up data.

Question 9

Conditions covered under critical illness?

Answer 9

• Core conditions
• Terminal illnesses
• Children benefits

Question 10

CI: Core conditions

Answer 10

• conditions covered are split into core and additional conditions.
• conditions that fall within these two definitions are revised 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 the claim definitions for many of the diseases.

Question 11

Major conditions

Answer 11

• this is a list of conditions that account for the majority of critical illness claims.
• heart attack
• Cancer
• stroke
• coronary artery by-pass graft

Question 12

A list of non-major conditions:

Answer 12

• Alzheimer’s disease
• AIDS/HIV contracted accidentally by blood transfusion or during occupation.
• heart valve replacement
• coma
• deafness
• loss of limbs
• third degree burns
• loss of speech
• blindness
• paralysis

Question 13

Terminal illness

Answer 13

• This is often added to complete the overall cover.
• It does not pay out on diagnosis of a specified disease, but instead the claim definition involves the severity of a condition and its effect on life expectancy. Eg death expected within a 12 month period.
• this ensures all conditions that reduce life expectancy are covered.
• for an acceleration product the main effect of terminal illness cover is to bring forward the payment of the death benefit and therefore cost of benefit is very small.
• terminal illness does not fit as a stand-alone critical illness plan where a death benefit is not payable.

Question 14

Children’s benefit

Answer 14

• cover can be provided for each child of the policyholder, usually until they reach the age of 18.
• claims of the children will not cease cover, cover will only cease on the policyholders claim.
• cost of cover is considered minimal compared to high perceived value of this benefit to parents.

Question 15

Tiered benefits

Answer 15

• This is a variant to the standard Critical illness policy in which for the one or not illnesses covered the payment of sum insured is linked to the severity of the disease.
• a proportion of the sum insured is paid out based on the progress of the illness at time claim is made.
• further claims may be made as the disease progresses more.
• the levels of severity will be clearly specified in the policy documents using objective medical definitions.

Question 16

Reasons for offering tiered benefits.

Answer 16

• 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 closely matched with the policyholder financial need. This reduces incentive for anti selection and thus exaggeration do symptoms at claims stage.
• multiple claims are possible which enhances policyholder satisfaction.
• 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 (and the insiders product potentially more profitable ).