Chapter 5 - Income protection Flashcards
Discuss the customer needs met by income protection products
Income replacement
- peace of mind (income stream while unable to earn)
- if state sickness/disability income insufficient
- employment benefits short term (employer continues to pay employee’s income)
Match loan servicing costs
- protection against inability to meet major financial loans
- required by lender
- may cover unemployment
Other needs
- fund other insurance premiums
- Employers keen to pass on financial responsibility
- IP on professionals in practice (locum cover)
List the key features of an IP contract
- Replaces income
- May be commutable (to provide lump sum/ not generally the case)
- Circumstances clearly defined for benefits to become payable/cease
- Benefits do not cease on claim
cover still provided if recover and return to work - Level/increasing premiums/benefits
may be at fixed rate relative to sum assured - No surrender/maturity value
+sum at risk is very large compared to regular premium.
once expenses/expected claims taken into account, little surplus left to build asset share - Own/similar occupations
- With profits/unit linked
+mostly without profits basis, no benefit paid if claim is not made
+bonus builds up death/expiry benefit, so bonus doesn’t affect IP claims
+unit-linked policies may have a morbidity charge deducted from fund, with remaining unit fund at end of policy term paid as maturity benefit
What are some important points to bear in mind when setting claims definitions for IP contracts?
- Need to strike a balance between meeting needs/controlling insurance risk
- can be difficult to assess incapacity, ADLs are objective
- should be allowance for interpretation
- price charged for contract may differ for different risks represented by the claim definition
What kind of claims definitions do we have for IP contracts?
Occupational based
- inability to perform own occupation (very expensive/greatest level of cover)
- inability to perform own/reasonable occupation by education, status, training
- own occupation initially thereafter, inability to perform any occupation
- offered where occupations carry above average accident/health risk
Alternative incapacity criteria
- assessing impact of illness on insured’es ability to perform tasks required by an occupation or day-to-day life
+activities of daily living
physical activity (feeding, dressing, washing, toileting, mobility, transfer)
+mental capacity (overrides tests of physical incapacity
+functional assessment tests
+activities of daily working
+personal capability assessment
What is over-insurance in the context of IP contracts , and how might it arise?
(1,5)
When benefit is more than is needed e.g. a higher than appropriate replacement ratio
Over-insurance arises:
* from outset
* subsequent to sale (salary not keeping up if benefits increase automatically on policy anniversary)
* reduction in tax on IP claims
* multiple policies
* non-disclosed income (receiving of non-disclosed income while sick)
How do we address over insurance in the context of IP contracts?
4
- Appropriate maximum benefit formula at point of sale, this may incorporate:
+max replacement ratio
+overall max benefit level
+deductions for other benefits example state benefits - review benefit level appropriateness
- clear policy conditions highlighting what would occur at the claim stage
- financial underwriting
Other policy definitions on IP contracts:
Waiting period
- specified period after policy start during which benefits won’t be paid
- reduce potential for anti-selection
- Uncommon now as anti-selection can be reduced through underwriting
- Deferred period definition and characteristics
- Reasons for deferred periods (5)
Deferred period
- Period of incapacity/sickness during which insured won’t pay benefits
- Split deferred period: eg pay half over for certain amount of weeks, full amount after
- Early notification (even before deferred period end so insurer can help with rehabilitation)
Reasons for non-zero deferred periods
- Integrate with employer-supplied benefits
- Reduce claim cost and therefore product price
- Reduce administration cost
- Reduce number of trivial claims
- meet customer needs: eg won’t want to claim for few days off for flue!
Definition (IP contract) : Linked claims period
Waive deferred period if same sickness recurs within certain amount of time e.g. 26, or 52 weeks since last claim to encourage return to work
What are the key risks to the insurer arising from selling IP contracts?
- claim inception rate (age, gender, smoking habits)
- claim termination rate (age, duration, gender, smoking habits)
- Data
- Anti-selection (significant for individual, reduced for group)
- Withdrawals (selective withdrawals, negative asset share)
- Moral hazard (robust policy condition/wording)
- Lesser risks
mortality, expenses, investment
What are the capital requirements typically found with IP contracts?
- Lower than for other contracts
- Frequency of premium
could be significant for single premium contracts - Contract Design
Reviewable charges and premiums will result in lower capital requirements - Initial expenses (acquisition/commission costs may be high due to complexity of the contract and heavy underwriting costs)
- Solvency capital requirement (due to difficulty predicting future morbidity)
- Lower than endowment/whole life, because there’s chance benefit never paid
- Reserving basis
prudence may need to be greater because difficult to predict sickness experience
