Chapter 5-Income Protection Insurance Flashcards
Discuss the customer needs met by income protection products
Main needs
Income replacement
+peace of mind (income stream while unable to earn)
+if state sickness/disability income insufficient
+employment benefits short term (employer continues to pay employee’s income)
Match loan servicing costs
+protection against inability to +meet major financial loans
+required by lender
may cover unemployment
Other needs
+fund other insurance premiums
+Employers keen to pass on financial responsibility
+IP on professionals in practice (locum cover)
List the key features of an IP contract
Replaces income
+would’ve earned if becomes unable to work due to accident/illness
+temporary annuity continuing until insured recovers/dies/annuity term ends, whichever comes first
May be commutable (to provide lump sum/ not generally the case)
Circumstances clearly defined for benefits to become payable/cease
+Not covered
unemployment, redundancy, early retirement, reluctance to return to work, some illnesses/physical injury e.g. HIV, attempted suicide
Benefits do not cease on claim
cover still provided if recover and return to work
Level/increasing premiums/benefits
may be at fixed rate relative to sum assured
No surrender/maturity value
+sum at risk is very large compared to regular premium.
once expenses/expected claims taken into account, little surplus left to build asset share
Own/similar occupations
With profits/unit linked
+mostly without profits basis, no benefit paid if claim is not made
+bonus builds up death/expiry benefit, so bonus doesn’t affect IP claims
+unit-linked policies may have a morbidity charge deducted from fund, with remaining unit fund at end of policy term paid as maturity benefit
What kind of product variations are possible on IP contracts in terms of guarantees/reviewability of premiums?
Guaranteed/renewable premium rates
+full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
+requires substantial loading (very long contracts, maybe high standard error for claims experience)
+higher reserves
No guarantee
+annual review
+comfort knowing premiums can be adjusted due to bad experience
+risks change
sickness that would’ve caused death, can now impair lives, leading to claims
terminal illnesses no longer terminal
+market pressures may limit premium increases
+selective lapsing, leading to portfolio with only poor lives left
+PRE: careful not to create expectations of no increases
+maximum increases
+uncertain future premium amounts
some guarantee
e.g guaranteed for first five years, with complete freedom review after
+Guaranteed insurability
+No Claims Discount
What options may we find with respect to benefits/premiums on IP contracts in terms of escalation?
+May be subject to a cap
+Ideally
escalation rate < earnings inflation
+difficult to match too high escalation rate
+Escalation rates might be different in and out of claim (can lead to complex product design)
Benefit increase usually accompanied by premiums increase
+based on the current premium rate (rather than premium assumptions prevailing when original contract effected) required for additional cover at a given age (protects against adverse experience)
What are some important points to bear in mind when setting claims definitions for IP contracts?
Claim definitions
+ Need to strike a balance between meeting needs/controlling insurance risk
+can be difficult to assess incapacity, ADLs are objective
+should be allowance for interpretation
+price charged for contract may differ for different risks represented by the claim definition
What kind of claims definitions do we have for IP contracts?
Occupational based
+inability to perform own occupation (very expensive/greatest level of cover)
+inability to perform own/reasonable occupation
by education, status, training
+own occupation initially thereafter
+inability to perform any occupation
offered where occupations carry above average accident/health risk
Alternative incapacity criteria
+assessing impact of illness on insured’es ability to perform tasks required by an occupation or day-to-day life
+activities of daily living
physical activity (feeding, dressing, washing, toileting, mobility, transfer)
+mental capacity (overrides tests of physical incapacity
+functional assessment tests
+activities of daily working
+personal capability assessment
What kind of benefit definitions might exist for IP contracts?
Replacement ratio (level of post-claim income to pre-claim income, net of taxes in both cases)
+easy to calculate
+tax impacts ratio (some regions do/don’t tax benefits)
+level indicates claim experience
as it influences incentive to return to work
+Require limits to ensure individuals have incentive to return to work
Maximum benefit specified
+in terms of salary at claim time
+in terms of state benefits
Benefits expressed as cash amount (requires annual review to check needs met)
Benefits in form of premium waivers
+waived when benefits are payable
+charged for by a small percentage addition to premium rate
Proportionate/rehabilitation benefits
+for those returning to work on part time basis/less strenuous/lower paid role
+benefits both insured/insurer
+recuperation needs (attractive to policyholders, doesn’t add sign cost)
+benefit relates to ratio (that gross earnings from new role bear to those from occupation against which disability was being claimed
+Benefit definitions mustn’t disinstinctive insured returning to work
What is over-insurance in the context of IP contracts , and how might it arise?
When benefit is more than is needed e.g. a higher than appropriate replacement ratio
Over-insurance arises \+from outset \+subsequent to sale (salary not keeping up if benefits increase automatically on policy anniversary) \+reduction in tax on IP claims \+multiple policies \+non-disclosed income
How do we address over insurance in the context of IP contracts?
Appropriate maximum benefit
+max replacement ratio
+overall max benefit level
+deductions for other benefits example state benefits
+review benefit level appropriateness
+clear policy conditions highlighting what would occur at the claim stage
+financial underwriting
Other policy definitions on IP contracts:
Waiting period
+specified period after policy start during which benefits won’t be paid
+reduce potential for anti-selection
+Uncommon now as anti-selection can be reduced through underwriting
Deferred period definition and characteristics
Deferred period benefits
Deferred period
+Period of incapacity/sickness during which insured won’t pay benefits
+Split deferred period: eg pay half over for certain amount of weeks, full amount after
+Early notification (even before deferred period end so insurer can help with rehabilitation)
Deferred period benefits
+Integrate with employer-supplied benefits
+Reduce claim cost and therefore product price
+Reduce administration cost
+Reduce number of trivial claims
+meet customer needs: eg won’t want to claim for few days off for flue!
Linked claims period
Waive deferred period if same sickness recurs within certain amount of time e.g. 26, or 52 weeks since last claim to encourage return to work
Expiry age/term
+age at which benefits cease; often same as normal retirement age
+The term could also be fixed duration
+shorter premium paying period than policy term
Briefly discuss group IP contracts (General)
+legal obligation eg some countries sick pay during first 2 weeks if sick
+The use of gross salary to provide benefits improves administration resulting cheaper (economies of scale) contracts
+smooth early retirement (when employee continuing in poor health)
+promote health (and ensure speedy return to work following operation)
Briefly discuss group IP contracts (Benefits)
Benefits
+level (based on salary gross of tax, usually max 2/3 - 75%
+additional (pension contributions, state welfare contributions)
+in claim escalation
Continuation option
+allows employee of company to effect individual policy without providing evidence of health when he leaves service of employer
+possibly increase anti-selection
