Chapter 6 - Product design and stakeholder interests (1) Customer interests

Question 1

What are the main product design factors that may affect the level of customer attraction and clarity arising from a particular product

Answer 1

PSG PM

• PROVIDING peace of mind
• SIMPLICITY and clarity
• GUARANTEED vs reviewable premiums and benefits
• PROVIDING cash
• MEETING specific needs

Question 2

What needs do health and care insurance satisfy?

Answer 2

• It can finance medical bills
• Can provide funds to finance the costs of lifestyle changes following a critical illness
• Can finance the cost of care in old age
• Can provide a lump sum benefit which can be used to repay loans

Question 3

What are the main needs of PMI

Answer 3

It depends on the level of State-funded healthcare and the level of State health insurance.

If state-funded care does not exists, then PMI will usually provide for all forms of healthcare needs on an indemnity base.

PMI is also bought when a individual wants a higher level of care, such as medical attention:
- Without waiting
- In higher standard of accommodation
- With doctor of choice
- In a local hospital

Question 4

What are the needs met by Critical insurance products

Answer 4

BAMBI R

• The BENEFIT can be designed to repay any loan when the policyholder is diagnosed with a critical illness
• A CHANGE of lifestyle can be funded where necessary to improve the claimant’s health
• MEDICAL costs can be funded when the illness requires surgery or other expensive treatment
• BUSINESS partners can purchase CI policies on the lives of each other such that the benefits will fund the buyout of the stake in the partnership when critical illness arises
• INCOME can be provided from the lump sum via an annuity when the individual cannot work as a result of his/her critical illness
• Other needs include RECUPERATION or rehabilitation treatment after illness, taxation planning, medical aids

Question 5

What are the main needs of Long-term care insurance

Answer 5

• It is to provide provision of some financial protection against the costs of care and assistance when a person becomes unable to look after himself.
• LTCI is usually bought to avoid dependence on the loyalty of unpaid care in this way

Question 6

What are the main needs met by microinsurance

Answer 6

• It is insurance that is targeted towards those who are working, but with low incomes. ( Those that have fewer savings to support themselves in times of need)
• It is characterised by limited benefits and very low premiums
• Microinsurance is not a product type in itself, it is the fact that it is aimed at those on low incomes that make it microinsurance

Question 7

What is the main needs met by cash

Answer 7

It provides the policyholder with a choice. It can be directly applied to meet personal needs, without being earmarked for particular purposes.

Question 8

What is meant by financing recuperation needs

Answer 8

It is when products are designed more than just to meet financial outgo when disabled or receiving treatment. Extra benefits such as personal support, advice and counselling are provided.

Question 9

What is the difference in payment methods between CI and Income protection

Answer 9

CI is a lump sump, whereas income protection is an income stream

Question 10

What is the Income stream of LTCI

Answer 10

Cash or indemnity benefits

In terms of indemnity, the insurer will generally take a longevity risk and may additionally promise to increase benefit levels in line with a suitable objective index of costs - but this is far short from indemnification

Question 11

How does insurance fulfil policyholders interests

Answer 11

The psychological effect of knowing that you are protected from the financial consequences of ill-health definitely fulfils a policyholder’s needs. Especially if they have dependents to be taken care of.

Question 12

What is Coinsurance?

Answer 12

It is where the policyholder pays a percentage of every claim cost

Question 13

What is an excess/deductible?

Answer 13

It is the amount that the policyholder has to incur before the insurer will pay anything on a claim

Question 14

What is pre-authorisation

Answer 14

It is when the patient needs authorisation from the insurer before the treatment begins, both to ensure that the medical facility is appropriate under the policy and that the procedure is covered.

This inturn reduces the number of disputes.

Question 15

For pre-funded LTCI, why does insurers prefer Cash benefits rather than Care benefits

Answer 15

• LTCI will not happen for a considerable time, so it makes the estimation of the probability of happening and the claim size when they do happen very difficult
• The type of illnesses that are prevalent in the future and how these illnesses are treated will influence the probability of needing long-term care
• A cash benefit only requires the insurer to estimate the probability of a claim, not also the claim size
• Premiums for care policies would be very high compared to premiums for cash policies, and so will be more difficult to sell
• Policies with care benefits will require larger reserves

Question 16

What uncertainties of the long-term care risk make it ‘too uncertain a liability’

Answer 16

The uncertainties surround the:
- Probability of a claim
- The duration of the claim
- The cost of a claim

Question 17

What does the probability of a LTCI claim depend on

Answer 17

• Type of accidents and illnesses that result in need for care in future (rather than now)
• New methods of treatment and advances in care technology

Question 18

What does the duration of a LTCI claim depend on

Answer 18

Duration of claims may also be affected by advances in medical treatment, for example they may prolong the insured’s life when they need care

Question 19

What does the cost of a LTCI claim depend on

Answer 19

• The costs of care (e.g. salaries of care workers)
• How care is provided (more high-tech care may be more expensive)
• Changes in supply and demand for care services

Question 20

Major health risks not covered by CI insurance

Answer 20

• Result of serious accidents (e.g. injuries following a car accident) unless these result in permanent disablement
• Psychiatric and similar illnesses, unless these result in permanent disablement

Question 21

What are the trigger points for LTC benefits defined in terms of

Answer 21

Activities of daily living
cognitive impairment

Question 22

The simplicity and clarity of PMI

Answer 22

The concept is clear, but policy conditions can complicate the product and lead to misunderstanding by Policyholders, in particular:

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• The UNDERWRITING and acceptance process
• PRE-authorisation may be required
• There may be LIMITS on the benefits
• Complicated ARRANGMENTS for risk sharing between policyholder and insurer
• Certain TREATMENTS may be excluded
• There may be EXCLUSIONS
• RESTRICTION to network hospitals

Question 23

What risks are the insurer exposed to if indemnity benefits are provided
- How can the insurer reduce this risk

Answer 23

• Exposed to fraud and moral hazard, where PH claims for more benefits than necessary
• Co-payments
• Setting annual limits for a certain condition or in total for the PMI cover
• excluding treatment where there is a greater propensity for consumers to demand or healthcare providers to supply more expensive treatment

Question 24

Why would the insurer prefer to provide cash benefits on a pre-funded LTCI than care benefits

Answer 24

• Since the events will not happen for a long period of time, it makes the estimation of it hapenning and the claim size when they do happen very difficult
• A cash benefit only requires the insurer to estimate the probability of a claim
• Premiums for care policies would also be very high compared to cash policies and therefore they will be more difficult to sell
• Care benefits will require larger reserves

Question 25

What is the principle of indemnity

Answer 25

Indemnity is ‘protection against loss’. So the insurance company will do whatever is necessary to return the insured to the state they were in immediately prior to the event happening

Question 26

Which 2 healthcare risks are not covered by CI

Answer 26

• The result of serious accidents, unless these leads to permanent disablement
• Psychiatric and similar illnesses, unless these result in permanent disablement