Chapter 3- South African Specific Products (Individual Life) 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 availa
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
- Clear disclosure, to mitigate reputational risk
- Reinsurance
- Retention incentives – eg cash back plans
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
Descibe 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-indemifying lump sum benefit payable when:
o Medical/CI Event (independent of extent)
o Reaching defined degree of impairment
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 Permanate 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
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
• Applicable to wider range of lives
o Including after retirement and self-employed
• Less subjective
• Only use one definition throughout policy term
• Products often don’t use ADLs as only claim criteria
o ADL & ADW defs serve as underpin for disability and CI products
Descrive 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.
Describe the regular benefit limitations on the replacement ratio for Income protection products? (2)
Benefit limits are applied (across all IP polices taken out by policyholder) to ensure that the insured has incentive to return to work:
- For the first two years of incapacity the benefit amount will not exceed 100% of the insured pre-claim income
- Thereafter the benefit amount will not exceed 75% of pre-claim income however if a condition is deemed permanent then the limit will remain at 100% of the insured pre-claim income
These benefits are applied across all IP policies that a policyholder has taken out to reduce overinsurance.
Describe the risk associated with Income Protection products? (3)
- There is significant morbidity risk which could either refer to higher claim inceptions than expects and fewer termination/recoveries than expected
- Underwriting, claims management and administration are more complex than other products which results in additional anti-selection and expense risk
- There is also the risk of moral hazard i.e. the insured may not notify the insurer of their recovery and it is difficult to monitor individual cases
Describe Key person insurance? (3)
• Employer-owned policies to protect the employer against financial loss in the event of death, disability or severe illness of a key individual
• Tax treatment of employer-owned policies can be complex
o actuary need to consult a tax expert when designing these policies
• Additional risk to insurer: early terminations where key employee leaves company (but underlying reason different to lapses of other risk products – need to feed this into assumptions)
Describe the needs met by key person insurance? (6)
• Financial loss consists of additional expenses as well as loss in profitability, due to having to: o Find suitable replacement o Up-skill another employee o Change the business model o Wind up the business
- Settle the loan account (in the business) of the director or owner
- Fund buy out of the shareholding of the diseased partner
Describe Credit life insurance? (6)
• Borrower are often required to have a policy covering the outstanding amount of the loan (e.g. purchae of consumer goods) over the repayment period
o To reduce risk of default if borrower were to die or become disabled
- Often include loss of income, retrenchment benefits and disability cover
- Sold in large quantities in the micro-loan industry
- Premiums (single or recurring) for terms of 3 months to 5 years
- NCA has disallowed the adding of the single premium to the initial loan (to be repaid in instalments)
Describe the risk to the insurer associated with credit life insurance? (5)
• Underwriting very limited BUT - Anti-selection risk is not as material since
o the life policy is secondary to an application for finance ( not a primary purchase)
o Pre-existing conditions excluded (mostly)
o Sum assureds relatively small
• Early loan repayments is a risk where policy has level premium payments for the full term
o decreasing SA (early cover is funded towards the end of the policy)
- Cross-subsidisation of premiums within age bands
- Profit share arrangements with finance provider Insurer may be forced to pay excessive amounts of profits (following profit share negotiations) to retain the business
- Reputational risk – reduced by introduction of credit life insurance regulations
Describe the impact of National credit Act on credit life policy premium, cover and exclusions? (5)
• Effective from august 2017
• Max charges (R2.00-R4.50 per R1000 per month)
• Min benefits
o Dies/ permanently disabled outstanding balance paid out
o Loses job/ permanently disabled pay instalments up to 12 months
o Not employed at commencement can’t be charged for retrenchment cover
• Limitations and exclusions to be applied e.g. maximum waiting periods, early retirement
Describe funeral assurance? (8)
• Provides an amount of money in the event of death of the policyholder and members of her family usually sold as term assurances
• Sophisticated and expensive funerals is part of South African culture
• Extended family members can be added to the policy for an additional premium
• Sum assureds are relatively small – but must be paid over quickly after death is notified
• Simple, with little or no underwriting
o If underwriting done, max SA higher and cost lower
• Short waiting periods (<6m) where only accidental death is covered
• Optional tombstone benefit – will be paid out up to one year after the death to cover the cost of the tombstone
• “Assistance business” according to Long-term Insurance Act
o Maximum sum assured of R100 000 increasing at CPI according to the Insurance Act 2017
o Not subject to commission restrictions
Describe the risks associated with funeral assurance? (4)
• Moral hazard – as there is no limit on the number of policies to be taken on a single life, particularly children
o Long-term Insurance Act imposes a limit on the aggregate across all life and assistance policies on the life of child
(R10,000 if younger than 6 & R30,000 if younger than 14)
- Fraud – as claims must be paid very quickly
- Mortality underestimated – especially with regard to AIDS
• Maintenance and premium collection expenses higher than expected – especially as these represent a large percentage of (small) premium
o Mitigate by having reviewable premium rates
