Pricing CI Insurance in Canada

Question 1

Steps for developing CI incidence rates (8)

Answer 1

No industry table is available. Carriers have minimum experience data. Incidence rates provided by reinsurers.

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

Question 2

CI Insurance product basic provisions (9)

Answer 2

1. Standalone product
2. Fully underwritten
3. Level face amount
4. Level premiums guaranteed to policy expiration
5. Face amount benefit is paid when covered condition occurs
6. Definitions of conditions that are guaranteed to policy expiration
7. Policyholder must survive for 30 days after diagnosis to become benefit eligible
8. Cancer not covered if occurs within 90 days of policy issue
9. Return of premium if death occurs prior to being diagnosed with a covered CI or death occurs during 30 day period

Question 3

CI product versions (4)

Answer 3

1. Basic that covers 3 or 4 major conditions
2. Enhanced that covers additional 15-20 conditions
3. Enhanced + ROPX (returns premiums at policy expiration)
4. Enhanced + ROPX + ROPS (returns premium at policy surrender)

Question 4

Pricing process for CI (8)

Answer 4

1. Develop CI incidence rates
2. Expense assumptions similar to term life insurance
3. Develop Premium rates - costing and true pricing
4. Premium rates adj for reinsurance
5. Rates differentiated by sex, smoking status, size, issue age
6. Financial proj calculated - takes into account expected sales and mix of business, profit, ROI
7. Rates interpolated to calc rates for all ages
8. Time prd to develop target rates to finalizing the product and its terms ranges from a few weeks to months.

Question 5

Pricing challenges for ROP riders (2)

Answer 5

1. Premiums commence at policy issue and benefits (RoP) occurs at later duration
2. Lapse and interest rate assumptions over period are important.
   
   • product is lapse supported
   • interest rates that are lower than assumed results in inadequate premiums.

Question 6

Develop premium rates by costing and true pricing (3)

Answer 6

1. Costing - financial objectives. Based on expected cost, profit objectives & cap requirements. Use commercial product modeling software.
2. True pricing - marketing objective. Use commercial premium rate quote services along with competitive info to set rates that achieves sales target goal.
3. Both approaches used until get rate that satisfies financial and marketing objectives.