Chapter 3 Flashcards
List various product categories of a Life insurer? (5)
- Risk products
- Investment Products
- Universal life products
- Annuity products
- Conventional with-profit
Describe risk products and their common features? (11)
- Provides mainly risk cover
benefits are provided in case of a life event (death, disability, critical illness) - Generally do not offer surrender or maturity benefits or include any savings element
- Features influenced by
o financial sophistication of policyholders and
o their access to financial advice - Policy term – whole of life, specified term or until specific age
o Whole of life no surrender value! - Choice of disability and critical illness benefits – whether they want it and definition
- Standalone or accelerator (for disability and critical illness)
o Standalone: sold without a death benefit no payment on death
o Accelerator: attached to a death benefit; if a CI claims occurs, the death benefit is reduced - Premium frequency – recurring (monthly, quarterly or annual) rather than single premium
- Premium paying pattern – level or increasing
- Level of cover – choose within benefit limits
- Future cover option (Guarantee insurability options) – option to purchase cover in the future without proof of good health, except for an HIV test
o Exercise on benefit anniversary or specified events (marriage, birth of child, new mortgage) - Products with limited underwriting (target low income segment): policyholder is not medically underwritten limit anti-selection through waiting periods etc.
Describe the risk applicable to risk products? (7)
- The primary risk is related to the accurately allowing for the incidence of the claim event in the pricing of the product
o An appropriate model allowing for correlations between conditions and illnesses, adequate data, additional risk margins, competitive premiums
o The current incidence rate may not be applicable in the long-term due to changes in medical science
o To the extent that disability may be linked to the economic cycles, there is a risk that there are changes in the economic cycle not allowed for premiums
- Anti-selection to weak underwriting procedures
- Weak claim definition may result in higher than expected claims
- Furthermore the claims management process may not be able to have the technical expertise to evaluate certain claims
- Reputational risk is the policyholder does not adequately understand the claim definition i.e. technical definition vs. layman understanding
- There is also withdrawal risk which may result in financial loss at early durations
- Furthermore the withdrawals may be selective which may result in worse morbidity experience for remaining policyholders
- There may be additional pricing and anti-selection if future cover options are available
- Medical advances leading to mismatch between incidence of disease and definition in policy contract.
List mitigation techniques to reduce these risks? (7)
- Underwriting – depends on the level of cover, entry age, the complexity of benefit
- Waiting period
- Reviewable premium rates
- Age limits applied to benefits
- Clear disclosure, to mitigate reputational risk
- Reinsurance
- Retention incentives – eg cash back plans
- Limited Sums Assured (SA)
Describe premium paying patterns for risk products? (3 main, 8 sub)
- Level premium
o High initial premium – premium significantly larger than that required to cover the cost of risk in early years
o Pre-funding: excess premium (in early years) is invested to fund the cost of risk in later years when the premium is insufficient to cover the risk - Compulsory premium growth
o Cheapest initial premium for a given cover level (benefit usually remain level)
o Increasing premium rates are priced into contract - Voluntary premium growth
o Automatic increase in premiums and cover to compensate for inflation
o Policyholder can at any time switch off the voluntary premium growth without penalty
o May contain a guarantee (or reasonable benefit expectation) that rates (i.e. relationship between premium increase and cover increase) will be the same as for new business
o anti-selection risk as better lives may switch off automatic increases and seek (cheaper) cover elsewhere
Describe various premium reviews conditions included in risk products? (4)
- ASISA Code on Policy Quotations requires insurer to disclose the potential for premium reviews at time of sale
o Expect reviews –> disclose expected level of premiums
o Do not expect reviews –> disclose circumstances that would cause premium review - Types of review:
o Yearly renewable policies – patterns above are not relevant as premiums can be reviewed and changed annually, used for most products with a simple design
o Premium reviews expected – increase at regular intervals (e.g. every 5 years)
o No premium reviews expected (but premiums only guaranteed for a limited period) – only review where actual experience is materially different to pricing assumptions
Describe waiver of premium benefits available on risk products? (2)
- Waives the premiums of the policy in case of pre-specified event
o (disability, death, retrenchment of specified life insured
o Life insured covered under premium waiver can be different from the life insured covered under the main policy
Describe Critical illness benefits as well as the characteristics for the inclusion of critical illness benefit? (7)
- Hybrid product – non-indemnifying lump sum benefit payable when:
o Medical/CI Event (independent of extent)
o Reaching defined degree of impairment (e.g. ADL)
o Undergoing surgery (surgical procedure) - CI illness characteristics
o Perceived by public to be serious and occur frequently
If not life threatening, at least lifestyle-threatening
o Clearly defined – no ambiguity
Difficult – medical terminology
Tiered benefits also make difficult
o Sufficient data for pricing
o Avoid anti-selection
Describe the needs that critical illness products meet? (6)
- Income can be provided from the lump sum via the purchase of an annuity when the individual cannot work as a result of their condition
- Medical costs can be funded such as treatment or expensive surgery
- Payment of mortgage of loan in the event when the policyholders health is in question
- Business partners can purchase critical illness on the lives of each other such that benefits will fund the buyout
- Recuperations needs after the illness example the installation of specialist equipment in their home
- A change in the claimant’s lifestyle e.g. moving to a less stressful job after a heart attack
Describe the problems and complications of critical illness products? (6)
- Claim Definitions (complex & differ between insurers)
o ASISA has introduced SCIDEP (Standardised Critical Illness Definitions Project) covering cancer, heart attack, stroke and CABG at four severity levels
o Insurers must disclose the extent to which their product definition is SCIDEP compliant - Lack of transparency at claim stage due to:
o Exclusions
o Point-of-claim underwriting
o Actual condition covered (in policy) is more severe than the colloquial understanding of the term - New diseases must manage expectations of policyholders and distributors
o Include these at little or no extra cost in a “catch-all” condition for which policyholder can only claim once
o Difficult to allow in pricing reinsurer assistance - Medical advances unpredictable
o Trends in incidence for different for each different CI moving in diff directions future product incidence rates difficult to predict - Windfalls where lump sum exceeds the immediate medical costs or longer term loss in quality of life (but difficult to quantify) potential moral hazard
- Standalone death benefit is not priced into the product insurer must manage risk of paying a claim if the policyholder dies soon after the CI event
o Policyholder must at least survive the survival period (usually 14 days)
Describe Permanente Disability Insurance? (3)
A lump sum non-indemifying benefit on a trigger event that can be:
- Occupational based
- Activities of daily living/activities of daily working
- Functional impairment and physical impairment
The cost of disability cover will depend on the definition of disability used
Describe occupational based disability definitions?
Disability is established by the inability to carry out an occupation. This could relate to the inability to perform:
* Own occupation (not suitable where skills can easily be impaired)
* Similar occupations for which insured is suited that are incorporate the qualification (education), status and skills (training and experience)
* Any occupation
NB that results from experience monitoring feeds back into pricing as claims are effectively paid on a more generous basis than priced.
Describe ADL based definitions? (6)
*The inability to perform a number of everyday tasks without assistance
ADLs as per ASISA standard critical illness definitions projects (SCIDEP) defs: feeding, dressing, washing, toileting, mobility, transfer
- Products often don’t use ADLs as only claim criteria
o ADL & ADW defs serve as underpin for disability and CI products
Advantages:
* Applicable to wider range of lives
o Including after retirement and self-employed
* Less subjective
* Only use one definition throughout policy term
Disadvantages:
* May be harder to satisfy this definition than the occupation-based one.
Describe physical or functional impairment definitions? (7)
Physical impairment are usually clearly defined in policy documentation
e.g. loss of one or more limbs,
extremities and senses,
burns,
permanent confinement to bed or wheelchair,
facial disfigurement
or amputation.
Functional impairment is more expensive and also makes use of the ADLs.
Describe Income protection products (8)
Income protection products also known as permanent health insurance (PHI) products replace the income that the insured with have earned if he/she become unable to work due to accident or illness (i.e. incapacity).
The benefit will be payable in the form of an annuity with payments ceasing on recovery, death or expiry of the policy.
The payments of benefits does not terminate the policy. Income protection will cover both temporary and permanent disability.
The claim definition will exclude:
* Early retirement
* Unemployment
* Injury caused by alcohol or drug abuse
* Self-inflicted injury/ attempted suicide
* Criminal activity
* War
* Not following medical advice
IP products are sold with a waiting period/deferred period i.e. the amount of time that the insured has to be fully or partially disabled before they receive benefit payments. The waiting period can rage form 7 days to 2 years
A policy may also include a linked claims period or “off period” which waivers the waiting period for a specified duration after a claim.
The benefit may be level or escalating with may be fixed or in line with inflation. The rate of escalation may be different inside and outside the claim period.
IP products also provide rehabilitation or proportion benefits to those who can work on a part time basis or in a less strenuous role.
What makes a CI policy complex? (5)
- Varying levels of payout
- Exclusions and point of claim underwriting
- Complex disease definitions
- Non-standard definitions
- Definitions may require certain evidence.
What is the purpose of survival periods for CI stand-alone products?
- Manages the risk that the LI will have to pay a claim if the PH dies soon after the CI event.
- Since death benefit is not priced into the stand-alone product
- Policy wording usually state that the PH must survive at least 14 days after the CI event to receive LS
What is the purpose of survival periods for CI stand-alone products?
- Manages the risk that the LI will have to pay a claim if the PH dies soon after the CI event.
- Since death benefit is not priced into the stand-alone product
- Policy wording usually state that the PH must survive at least 14 days after the CI event to receive LS
Needs that are met by CI policies
- Repay debt when PH’s health is in question (mortgage/other loans)
- Recuperation/rehabilitation after CI, taxation planning, medical aids (e.g., install specialist equipment)
- Medical costs when surgery/other expensive treatment needed
- Income from the LS via an annuity when PH cannot work as a result of CI (fund loss of earnings)
- Lifestyle changes where necessary to improve claimant’s health (e.g., move to less stressful lower paying job after CI)
- Keyman cover - buyout stake in partnership when CI arises (partners buy CI policies on each other)
Major criticism of occupational definitions for permanent disability cover
It cannot be applied to self employed home workers, those not in employment or those past the retirement age.
Risks of IP/PHI products
- Risks of SA risk products in general also relevant for IP products.
- Morbidity risk: Risk of greater than expected claims, which could be due to:
- Higher inception rates than expected
- Lower recovery rates than expected - Administration, underwriting, claims management more complex than for other LI products
- Anti-selection
- Expense risk
- Moral hazard
- As the claimant might not notify the insurer of recovery
- From the insurer’s perspective it is difficult to monitor each individual case
Describe Key Person Insurance
- Insurance policies are “employer-owned” policies
- Typically purchased to protect employer in the event of death, disability or severe illness of a key individual. - Important for business profitability
- Employer options after the loss of a key individual:
- Find suitable replacement
- Up-skill another employee
- Change the business model
- Consider winding up the business - Value of benefit should represent financial loss suffered by employer
- Additional expenses + lost profits - Additional uses of KP insurance:
- Repay debt
- Buyout shareholding of diseased partner - Various tax treatments:
- Depending on policy structure (actuary should consult tax expert when designing policy)
Describe Credit Life Products
Customers of consumer goods may require finance to purchase these goods, especially if they are relatively expensive.
- The institution providing the finance wishes to reduce the risk of default if the borrower were to die/become disabled.
- Finance company would usually make it a condition of the loan that the borrower obtains a policy covering the outstanding amount of the loan over the repayment period.
Note that credit life policies are also sold in large quantities in the micro-loan industry.
The National Credit Act (NCA) took effect August 2017 (affects credit agreements concluded after this date).
Regulations of Credit Life Products
- Single premium cannot be added to the initial loan consideration and repaid in instalments over the term of the loan (often used to happen prior to the NCA)
- Prescribes maximum charge for credit life insurance
- Prescribe minimum benefits that must be offered to consumers.
- Prescribed limitations/exclusions that apply to the insurance cover
- If the consumer dies/becomes permanently disabled - outstanding balance of the consumer’s debt must be settled
- If the consumer loses job/becomes temporarily disabled - the policy will pay instalments due under the credit agreement for up to 12 months.
- If a consumer is not employed when entering the contract, consumer cannot be charged for retrenchment cover.
Risks to the company of credit life insurance
- Limited medical information provided at application stage
- Potential for AS immaterial
- Since usually sold as secondary policy as part of the application for finance
- Small SA - Early loan repayment - If the policy has a level premium for the full term (due to decreasing SA)
- Cross subsidisation - Premiums are normally banded by age and cross subsidisation takes place within age bands
- Profit share risk - There is often a profit share agreement with the finance provider
- Reputational risk
- Greatly reduced by the introduction of the credit life insurance regulations that increase consumer protection.
Describe Funeral Assurance
- Provision of sophisticated and expensive funerals is part of South African culture.
- Provides amount of money in the event of the death of the PH or a member of his family
- Small SA, however, there is a need to pay the benefits quickly after the death has been notified
- Generally these policies are sold as TAs.
- Simple products, with low minimum premiums and little/no underwriting
- Often have short waiting periods (<6 months) where only accidental death is covered.
- Tombstone benefit - paid out up to one year after death to cover the cost of a tombstone
- Often sold by funeral parlors and retailers
- Often classified as “funeral business” ito Insurance Act 2017.
- Specifies the max SA of R100000
- NOT subject to the commission restrictions imposed by the Act on other individual business
- LTIA places limits on lives of children (due to MH)
