Critical Illness in Canada and LTC

Question 1

Types of critical illness policies (12)

Answer 1

1. Standalone – offers coverage only for critical illness
   a. Basic – covers only cancer, heart attack, stroke, and sometimes coronary artery bypass graft
   b. Enhanced – includes 15-20 additional conditions and costs ~30% more
2. Acceleration – combines coverage for both CI and death. Pays the face amount on the earlier to occur of critical illness or death
   a. Alternative is partial acceleration. Some % of the face amount (25-50%) is paid for CI, after which the remaining face amount remains in force as death protection only.

Question 2

Critical illness pays the face amount when (13)

Answer 2

1. The insured is diagnosed with a condition covered in the policy. The diagnosis must be made by a doctor and must be supported by objective evidence
2. The condition meets the definition in the policy and is not excluded by any other policy provision (see separate list)
3. The insured survives for a specified period (usually 30 days) following diagnosis

Question 3

Conditions covered by critical illness (13)

Answer 3

Typically covered in basic:

1. Life threatening cancer
2. Heart attack – may exclude mild ones that occur within a couple days of an angioplasty
3. Stroke – requires measurable neurological deficit that persists for 30 consecutive days
4. Coronary artery bypass graft – similar procedures that don’t involve grafts are always excluded

Covered in enhanced:

1. Multiple sclerosis
2. Kidney failure requiring dialysis
3. Major organ transplants
4. Cardiovascular – heart valve replacement and aortic surgery
5. Degenerative – motor neuron disease, Parkinsons, Alzheimers
6. Brain – coma and benign brain tumor
7. Head – blindness, deafness, loss of speech
8. Body – loss of limbs, paralysis, major burns, occupational HIV
9. Loss of independence (covered only by some companies)

Question 4

Optional product features on critical illness (14)

Answer 4

1. Return of premiums on death
2. Return of premiums on expiry
3. Return of premiums on surrender – returns a defined % upon surrender prior to expiry – may increase to 100% over time
4. Face amount increasing (inflation) or decreasing (match declining principal on mortgage)
5. Partial benefits (10-25%) payable for some non-life threatening conditions which have been excluded
6. Assistance – provides medical consulting advice for the diagnosed illness
7. Guarantee that premiums won’t change

Question 5

Steps for developing critical illness incidence rates (17)

Answer 5

1. Start with general population age-specific incidence rates from govt sources and research organizations for the various illnesses covered
2. Adjust these rates to fit the condition definitions in the policy
3. Apply any applicable trends (such as decrease in heart attack rates)
4. Use ratios of insured lives to population mortality to adjust rates from the general population to an insured population
5. Use ratios of nonsmoker to smoker mortality to segment rates into nonsmoker and smoker rates
6. Use ratios of select to ultimate insured mortality to create select and ultimate rates
7. Compare the rates to any available insurance experience and adjust as deemed necessary
8. Sum the rates for each of the major conditions covered, then add small amounts (~1%) for each additional covered condition

Question 6

Recent financial difficulties faced by LTC insurers (26)

Answer 6

1. Reduced investment earnings caused by historically low interest rates
2. Higher costs of providing LTC
3. Strong persistency, resulting in more policies than expected sticking around long enough to be eligible for benefits

Question 7

Product structure for life and LTC combo plans (29)

Answer 7

1. LTC benefits are provided as riders or benefit provisions in universal life, variable universal life, indexed universal life, and whole life insurance plans
2. LTC benefits are typically paid out as an accelerated benefit. Payments are accompanied by $ for $ reductions in the life policy face amounts
3. The cost of this benefit is the cost of accelerating the payment that otherwise would be paid at death
4. Independent LTC riders (extension of benefit riders) are increasingly being sold together with an accelerated benefit rider. The independent benefit begins once the accelerated benefit provision ends

Question 8

Product structure for annuity and LTC combo plans (29)

Answer 8

1. LTC benefits are provided together with a fixed annuity (most common), a variable annuity, or an equity-indexed annuity
2. 3 approaches are commonly used for benefit payouts
   a. Tail design – LTC benefits are paid from the account value until the max accelerated benefit has been exhausted. Then an extension of benefit provision continues payments at the same monthly level for a specified period of time
   b. Coinsurance approach – accelerated and independent benefits are paid concurrently in fixed proportions until the LTC benefit limit is exhausted
   c. Pool design – benefits are based on a max LTC pool amount defined at issue (such as 300% of the account value at issue). Benefit payments reduce the LTC pool and the account value on a $ for $ basis until the account value is depleted. Then independent benefits are payable until the max LTC pool has been paid out in full

Question 9

ASOP 18 - LTC pricing assumptions (35)

Answer 9

1. Morbidity (see separate list)
2. Mortality – consider the effect of selection and classification of applicants
3. Lapses – consider marketing, competitiveness, payment mode and method, nonforfeiture benefit
4. Expenses – product development, commissions, marketing, compliance, UW, issuance, policyholder service and claim administration
5. Taxes – reflect tax reserve basis of the plan as well as the premium, income, or other applicable taxes
6. Investment return – consistent with returns on assets supporting the liabilities
7. Mix of business – consider distribution of age, gender, marital status, UW classes, distribution system, and plan options
8. Change over time – for assumptions likely to change, consider reflecting change

Question 10

ASOP 18 - considerations in setting LTC claim cost assumptions (35)

Answer 10

1. Claim costs will vary by nursing home, assisted living facility, and home health care
2. Substitution effect among the various benefits
3. Increased demand for LTC services due to presence of insurance
4. Availability of benefits from other programs (like Medicare)
5. Availability of LTC services in the geographical area
6. Effect of UW selection and UW classes
7. Financial benefits to the claimant of remaining eligible for benefits (not getting well)
8. Effect of mortality on termination rates
9. Effect of marketing and claims processes