GHDP 129-19 - Pricing Critical Illness Insurance in Canada

Question 1

Introduction

Answer 1

Emphasis on process within the company and development of CI incidence rates. Reference is standalone Level Term policy to 75, fully underwritten, sold by financial advisors alongside term life insurance products

Question 2

Company Structure

Answer 2

1. Product development / pricing actuaries are typically in marketing department of life company (therefore under pressure to produce most competitive product possible)
2. Corporate actuary must sign off on financial projections of the product prior to releasing a new or updated product. Bias is to ensure company makes appropriate level of profit on each product and doesn’t use too much capital
3. Creates adversarial situation between competitiveness and profitability

Question 3

Product Design Process

Answer 3

Joint effort between actuaries, marketing and underwriters, with input from medical and claims personnel
- Marketing – identify what product features are desirable
- Underwriters – develop the underwriting questions for the application and rules to be followed
- Actuaries – review total package and ensure product design is sound, that anti-selection is minimized and that u/w process is consistent with incidence rates used in pricing

Question 4

Product

Answer 4

1. Level Term to 75 is one of the two most popular plan types in Canada (other is a 10-year renewable term to age 75)
2. Product Design:
   a. Standalone
   b. Fully underwritten
   c. Level face amount
   d. Level premiums, guaranteed to expiry
   e. Full face amount paid for each condition
   f. Definitions that are guaranteed to expiry
   g. Required survival period of 30 days after diagnosis
   h. No payment for cancer diagnosed during first 90 days after issue
   i. Return of premium on death prior to being diagnosed with a covered critical illness or during the 30-day survival period
   j. No cash or paid up values, unless separately noted
3. Product may be offered with four versions:
   a. Basic (covering only 3-4 major conditions)
   b. Enhanced (covering 15-20 additional conditions)
   c. Enhanced plus Return of Premium on Expiry
   d. Enhanced plus Return of Premium on Expiry and Return of Premium on Surrender

Question 5

Pricing Process

Answer 5

1. Critical Illness Incidence Rate – probability (during the year) of being diagnosed with a covered critical illness, meeting the policy definition, and still being alive at the end of the period

2. Pricing is similar to pricing a Life policy, except using incidence rates instead of mortality rates
- Assumptions for items such as sales compensation, expenses and taxes are also similar to Life

3. Two main pricing approaches:
(1) Commercial Product Modeling Software – assumptions are input into system, along with criteria such as profit objectives and capital limitations (this method can be considered “costing” – prices depend mostly on costs)

(2) Commercial Premium Rate Quotation Service – together with criteria to position premium rates relative to major competition to get target premium rates (this method is more of a true “pricing” where price is set to achieve desired level of sales)

4. Both approaches are used concurrently – assumptions are refined and target rates adjusted until it meets a good balance of financial objectives (costing) and desired level of sales (pricing). This can be a time consuming process, and most rates are set for 5 year age increments
5. Most Critical Illness business is reinsured, so reinsurer’s pricing has to be reflected in the process
   - If reinsurer’s pricing assumptions are aggressive, premium rates will be lower than otherwise possible
6. Once rates are determined for the selected 5 year increments, actuary extends this to the remaining population (other gender, smokers v. non-smokers, etc)
7. Premium rates are typically differentiated by:
   - Sex (2 options)
   - Smoking Status (2 options)
   - Size Band (4 options, usually)
   - Issue Age (9 options)
8. This results in 2x2x4x9=144 different rates, all on a consistent basis.
9. Several cycles of updating assumptions, target rates and negotiating with the reinsurer often occur until an acceptable compromise is found
10. Projections are prepared based on expected sales and sales mix, along with “what-if” scenarios to show financial implications of deviations from the best estimate case
11. Finally, actuary calculates the in-between ages by interpolation of rates. Final rates are provided to
    marketing and systems teams.
12. Typical process can take between several weeks (best case scenario) to several months

Question 6

CI Incidence Rate

Answer 6

1. Unlike Life, there are no industry tables for CI incidence rates, and most companies have little or no credible experience
2. Companies often obtain CI rates from reinsurers
   - Some reinsurers augment their information with history from other countries that have had this coverage in place as many as 12 years prior to Canada

3. Incidence Rate Development Process
- Start with General Population – age-specific incidence rates, obtained from government sources and research organizations
- Adjust Rates based on Condition Definitions
- Apply Formula to Account for Trends over Time
- Use Ratio of Insured Lives to Population Mortality – to adjust incidence rates from general
population to an insured population
- Use Ratio of Non-Smoker to Smoker Mortality – to segment aggregate incidence rates into
smoker and non-smoker rates
- Use Ratio of Select to Ultimate Mortality – to create select and ultimate incidence rates o Compare Rates to Experience Rates – adjust as deemed appropriate

4. Heart attack incidence rate illustration:
   - Population statistics give info on the number of heart attacks per hundred thousand population per year
   - For Critical Illness, this has to be honed down to include only first heart attacks, as people with prior heart attacks wouldn’t be insured. It would also have to be reduced for those where the insured survives at least 30 days (specific survival period)
5. Rates for each of the major conditions are totaled and small amounts are added for the less common
   conditions (e.g. 1 percent for each)
   - Rule of Thumb: 85% of the total incidence rate for all conditions are accounted for by the Big 5 Conditions and remaining 15-20 conditions are about 1% each
   [Study Note 103-14 talks more about the specific conditions]
6. Using emerging experience from other countries requires caution, as incidence rates can vary greatly from country to country based on health care system, genetic characteristics of the population, diet, climate, fitness, etc.
   - E.g. MS is more common in cold climates, Skin cancer is most common in Australia, Coronary bypass is most common in the US
   - Additionally, product type, underwriting, buyer mix and the reason for buying insurance may vary by country

Question 7

Return of Premium on Expiry or Surrender

Answer 7

1. Very common rider in Canada (in spite of the substantial increase in premium rate due to this rider)
2. Consumers like the idea of being covered for critical illness and also having all premiums paid returned to them at a future date
3. Pricing is difficult because premiums start at issue but return of premium is a number of years down
   the road (up to 15-40 years)
4. Lapse and interest rate assumptions are very important due to long duration
   - Lapse supported – i.e. lower lapses result in lower profits or even losses