GHDP 126-19, Mooney: Product Design of CI Insurance in Canada

Question 1

Basic Types

Answer 1

1. Standalone - coverage for critical illness only (most sold by financial advisors are this type)
2. Acceleration - combine with coverage for critical illness and death

Question 2

Product Design Process

Answer 2

1. Joint effort between actuaries, marketing and underwriters to find optimal balance between benefits and features, underwriting requirements and price
2. First introduced in South Africa in 1983, and Canada in 1995, so this is still in its infancy. There is not much usable critical illness experience data
3. Specific Areas of Concern:
   - Definitions - Limiting benefits for conditions that are non-life threatening when diagnosed (e.g. early prostate cnacer)
   - Avoidance of Anti-Selection at Issue - e.g. cancer claims submitted shortly after issue
   - Potential High Cost of benefits for Some Conditions Beyond Age 75 - e.g. Alzheimer’s
   - Potential High Cost of Long-Term Guarantees - due to advances in medical science leading to earlier detection

Question 3

Standalone Product Chassis

Answer 3

Three Main Versions:
- 10 Year Renewable Term to Age 75 (T10)
- Level Term to Age 75 (T75)
- Level Term to Age 100 (T100)

Question 4

Definition of CI Insurance

Answer 4

1. Insured is Diagnosed with Covered Condition
   a. Diagnosed by doctor and supported by evidence
   b. Basic version covers Cancer, Heart Attacj, Stroke and Coronary Artery Bypass Graft
   c. Enhanced version covers 15-20 additional conditions
   - Costs about 30% more and accounts for about 95% of sales by financial advisors
   - Perceived value of additional coverage is greater than the additional premium being charged
   d. Big 4 conditions plus Multipe Sclerosis account for 85%-90% of all claims
2. Condition Meets Defition in Policy and is Not Excluded
   a. Most covered conditions are qualified to eliminate benefits for conditions that are not life-threatening when diagnosed
   - Helps to control the price
3. Insured Survives For a Specified Period
   a. Benefit is intended to provide a benefit to offset the financial consequences of surviving a critical illness. Not intended to compete with life insurance
   b. Specific survival period (usually 30 days) is sufficient to differentiate between immediate death from the condition and survival of the critical illness. Specified survival period may be longer for some conditions
4. Conditions
   a. Life-threatening Cancer
   - over 200 types of cancer, so this is very specific, and early stages of certain non-life threatening cancers are not covered
   - 90 day exclusion period following policy issuance to prevent people from purchasing the coverage when they suspect they may have cancer
   - Some companies allow the coverage to continue in force without cancer coverage but at the same premium; others rescind the policy

b. Heart Attack
- May be an exclusion for every mild heart attack that sometimes can occur a few days following angioplasty
c. Stroke
- May be an exclusion for very mild heart attack that sometimes can occur a few days following angioplasty
d. Stroke
- Mini-strokes (Trans ischemic attack (TIA)) are always ecluded
e. Coronary Artery Bypass Graft (CABG)
- Note - this is a procedure rather than an illness
f. Multiple Sclerosis
g. Kidney Failure requiring Dialysis
h. Major Organ Transplant
i . Cardiovascular (2) - heart valve replacement, aortic surgery
j. Degenerative (3) - Motor neuron disease, Parkinson’s , Alzheimer’s
k. Brain (2) - coma, benign, brain tumor
l. Head (3) - blindness, deafness, loss of speech
m. Body (4) - loss of limbs, paralysis, major burns, occupational HIV

5. Exclusions
   a. Exclusions related to a particular condition are usually incorporated into the definition of the condition
   b. Other exclusions are similar to those in Life Insurance - self-inflicted injury, drinking and driving, drugs, criminal offense, etc.
6. If Insured Dies, the Policy terminates - two cases:
   a. Accident - caused by a situation unrelated to a condition covered by the policy
   b. Diagnosed but dies before survival period ends - diagnosed with critical illness but dies before the survival period ends. There is a significant chance of this with heart attack or stroke

Question 5

Return of Premiums and Other Features

Answer 5

1. Return of Premiums
   - Insured’s benficiary may find it unfair to pay for years of premium without any beneift
   - Some companies automatically include this rider, others add as an option with ~5% cost increase
2. Return of Premiums on Expiry
   - Unique to Canadian Critical Illness policies
   - Inexpensive at young issue age, but more expensive at older issue ages
3. Return of Premiums on Surrender
   - Unique to Canadian CI policies
   - Returns some percentage of eligible premiums upon surrender prior to expiry date as a specified duration, usually duration 10,15,20. Simple a cash surrender value expressed as a percentage of premiums paid. Any partial benefits paid would reduce this amount
   - Percentage may start less than 100% and increase to 100% over time
   - Rider can be very expensive
4. Other Features
   a. Face Amount Increasing or Decreasing Over Time
   - Increase to keep up with inflation or decrease to match the declining principle remaining on a mortgage or loan
   b. Partial Benefits for Non-Life Threatening Condition
   - Usually 10% or 25% of Face Amount
   c. Assistance Benefit
   - Provides medical consulting advice and assistance in respect of the critical illness condition diagnosed

Question 6

Guarantees, Variations and Range of Premiums

Answer 6

1. Guarantees
   a. Conditions covered are guaranteed - no changes by insurer as to which are covered
   b. Definitions of conditions are guaranteed
   c. Premium rates are guaranteed
   All insurers provide full guarantees on the first two, and most companies provide the third
2. Variations
   a. Many options available to customize and meet the needs of the client”
   - Product Type (3 variations)
   - With or without return of premium on death (2)
   - Basic or Enhanced Conditions (2)
   - With return of premium on expiry & surrender or neither (3)
   - Level or non-level face amount (2)
   - Full or Limited Pay (2)
   - Fully Guaranteed Premium Rates or Not (2)
   b. Results in 288 variations (compared to typically only about 3 in Life Insurance)
3. Possible Ranges of Premiums
   a. Loaded premium (with Return of Premium on Death, Expiry and Surrender and Enhanced conditions) can be up to 2.16 times that of a basic premium (in example shown in study note)
   b. Premiums for 3 variations in policy also shown to be 1.7-2.8 times higher than the cost of life insurance

Question 7

Acceleration Critical Illness Insurance

Answer 7

1. Full Acceleration - Pays full amount on earlier of CI or Death
   - Resulting premium is lower than Life plus standalone CI because it only pays on one event
   - Good example of this would be mortgage protection - if a critical illness or death, the outstanding principal would be paid off, eliminating the financial burden
2. Partial Accleration - pays some percentage of the face amount (25% or 50%) for CI and would pay the remaining face amount upon death
   - Because benefit is payable upon CI as well as death, no need for 30 day survival period
   - Premium is high than standalone because it also pays upon death
   - As with the Full Acceleration, cheaper than Life plus standalone because it only pays on one event

Question 8

Sales Statistics, Is It Too Expensive? Which Product to Recommend

Answer 8

1. Sales Staistics
   a. Average Face Amount is $70,000 and average annual premium is $900
   - For comparison, average life policy face amount is $270,000 and premium is $1,700
   - Face Amount of average life policy is almost 4x that of CI, while premium of life almost double. Therefore, average premium rate per thousand of CI is double that of Life
2. Is CI Too Expensive?
   a. Statement sometimes made by financial advisors (mostly selling Life Insurance)
   b. In terms of T10 rats, rates are about 3x higher than term life rates
   - But incidence rates are a similar multiplier of life rates
   - So it can be said that it is “more important” rather than “too expensive” compared to life insurance
3. Choosing Which Product to Recommend
   a. Considerations in Whicch Company’s Product to Recommend
   - Definitions
   - Partial Benefits - for non-life threatening conditions
   - Price - including renewal rates for renewabe term
   - Company’s Financial Condition - to be able to pay future claims (note that Assuris covers 100% guarantee on Face Amount up to $60,000 and 85% for larger policies)
   - Underwriting requriements
   - Claims Practices
   - Return of Premium on Expiry or Surrender - if inlcuded

b. Critical Illness vs. Disability
- Critical illness is not a substitute for Disability
- Only 15-20% of claims would be covered under both policies/overlap

c. Critical illness vs. Life
- Chances of claiming on CI in a given year is 3 times that of claiming on a life policy

d. Advisor’s Potential Liability
- Advisors expressed concern about liability related to:
(1) Definitions - when another company’s definitions of a condition appear to be more generous
(2) Additional Condition - when another company offers an additional condition
- In the end, insurance companies’ intentions to pay benefits for various conditions are usually quite similar, despite differences in wording of definitions
- Financial advisors should probably be more concerned about liability of not offering CI to their clients