Competing Risks

Question 1

Health insurance

Answer 1

Insurance taken out to cover the cost of medical care

Question 2

An income protection insurance contract

Answer 2

• pays an income to the policyholder while that policyholder is deemed as being sick’ (with the definition of sickness being carefully usualled in the policy conditions). • If the policyholder recovers, the cover under the policy usually continues, so that subsequent bouts of qualifying sickness would merit further benefit payments.
Such policies are usually subject to a deferred period (eg 3 months) of continuous sickness that has to have elapsed before any benefits start to be paid, and during which no benefit is payable.
• Premiums for these policies would normally be regular (eg monthly) and would typically be waived during periods of qualifying sickness. This means that premiums would not be paid at the same time as benefits are payable.

Question 3

critical illness insurance

Answer 3

• normally pays a lump sum on diagnosis of a defined ‘critical’ illness (such as cancer)

Question 4

long-term care insurance

Answer 4

pays an income contingent upon the policyholder requiring long-term care, and hence supports the costs of receiving that care.

Question 5

A multiple state Markov model

Answer 5

• the possible states that can be occupied
• the possible transitions that can be made between the states lie all the arrows in the transition diagram)
• the values of the forces of transition between the states at each age.

Question 6

Multiple state models

Answer 6

• are well suited to valuing cashflows that are dependent on multiple transitions, such as of health insurance contracts.
• The model will be chosen to include the relevant states, and transitions between states, that are necessary to replicate the required cashflows for the contract concerned.

Question 7

A multiple decrement model

Answer 7

A multiple decrement model is a multiple state model which has:
● one active state, and
● one or more absorbing exit states.