Chapter 6-Critical illness insurance Flashcards
Describe a critical illness insurance contract
Product which provides a non-indemnifying lump sum on the occurrence of events specified in contract terms, typically related to:
+critical illness event
+reaching defined level of impairment
+undergoing surgical procedure
Customer needs met \+mainly protection \+fund medical costs \+fund lifestyle change (e.g. medical equipment installed at home) \+recuperate after CI event provide income from lump sum via annuity if can't work after CI event \+loan repayment \+taxation planning \+buyout partner (key person cover)
Rather simple idea: pay lump sum, not meant to indemnify
Usually no surrender benefit or maturity benefit
Group version may exist
+employer offers as part of attractive remuneration package
+valuable to blue collar employees, if IP unavailable
+requires clear definition of eligibility and benefits
+likely standalone
+usually short term, annually reveiwable, premiums may be shared
+may include multiple dependants
+free cover limits may apply (above which, underwriting needed)
In addition to the core description of CI contracts, what other key features exist?
Specifically forms of the contract, Idea of cover given and complications that apply.
Form of the contract may be:
Standalone: benefit paid on CI event defined, no death benefit
Rider: CI benefit payable both for CI event, and death benefit payable on death
Accelerator: benefit payable on either CI event or death, whichever occurs first.
Benefit may be paid in part for CI, and remainder on death.
Rather simple idea…
Pay lump sum which can’t be ‘taken back’ by insurer, unlike IP, where recovery leads to end of benefit payment
not meant to indemnify- lump sum specified not related to claim event
…complications arise
different definitions for conditions between insurers in same market
severe/strict requirements for conditions compared to layman’s understanding
What characteristics are required for a condition to be deemed as ‘critical’, and hence seen as worthwhile being provided for via a CI contract?
Perceived as serious threat by public (lifestyle threatening)
Perceived to occur frequently by public (or not too rate that no public isn’t threatened)
Clearly definable
avoid ambiguity at claim,
prevent windfalls claims
Sufficient data to price
population-wide data
Difficult to predict future medical trends
Anti-selection can be avoided by the insurer
e.g with moratorium period (period during which claims aren’t allowed if underwriting suspected insufficient)
What broad “categories” of conditions might be covered by a CI contract?
Core conditions (covering majority of all CI claims)
Additional conditions
Terminal illness conditions
Conditions influencing children
Total permanent disability
Briefly list core conditions typically covered by CI contracts
These conditions make up majority of all CI claims
Cancer
Heart-attack
Stroke
Coronary artery bypass graft
Also included the following of late
kidney failure
major organ transplant
multiple sclerosis
These core conditions may be agreed industry wide
What are the benefits of having core conditions for CI policies agreed industry wide?
uses experience of many insurers can be used to estimate transition probabilities resulting in more credible estimates
Sharing of expertise, in interpreting current medical conditions and future advances
Shared costs of developing/maintaining policy conditions
Easier to collect comparable industry wide data
Better information to assess risks which results in lower risk loading => lower premiums
Easier for prospective policyholder to understand to understand claims definition
Reduces ambiguity
hence, easier for sales staff to explain hence, more sales in general
Claims settled more quickly
fewer disputes, reduced expenses, reduced reputation threat
Briefly list additional conditions which may be covered by CI contracts (i.e. in addition to core conditions)
These additional conditions are usually included on the basis of competition/product differentiation in a competitive market.
Alzheimer's disease AIDS/HIV (contracted by blood transfusion/occupation) aorta graft surgery benign brain tumour blindness coma deafness heart valve replacement/repair loss of limbs loss of speech motor neuron disease paralysis/paraplegia Parkinson's disease third degree burns chronic emphysema diabetes pre-senile dementia rheumatoid arthritis
Discuss the conditions and benefits covered by CI contracts in relation to terminal illnesses
These conditions don’t relate to a specific CI disease..
…but rather the severity of a condition and its effect on life expectancy
Essentially accelerate the death benefit, thus additional cost is minimal
Can cease prior to end of term, e.g may not be paid 12 months prior to policy end…
…because terminal illness is seen as health state from which death would occur within 12 months, and death would thus fall outside the term of the policy.
Usually present where death benefit already part of policy…
…where there are no death benefits, terminal illness benefit could add significant cost, and various causes would need to be investigated
Discuss the conditions and benefits covered by CI contracts in relation to children’s benefits
Usually a rider benefit
…providing similar cover to insured’s children, usually until age 18 (when can cater for selves)
Claim from children doesn’t terminate policy…
..only claim from insured policyholder terminates policy (different for tiered benefit, covered later)
Exclusions may be used, related to disabilities that could be caused intentionally (some parents would go to far means to extract benefit :( )
pre-existing congenital effects
Cover may be limited to a certain % of insured’s cover
Cost is actually very low, compared to perceived benefit (because of low incidence rates in healthy kids!)
Discuss the conditions and benefits covered by CI contracts in relation to total permanent disability (TPD)
Such benefits often included as TPD complements CI cover…
…despite different nature of criteria for valid claim (can be significant overlap between TPD and CI
Definitions for permanent disability may be based on
Occupation
Related ADL; advantages over occupation based definition
+less subjective than ability to perform occupation
+simplicity of using one definition throughout policy
+applied beyond retirement
applied to wider range of lives,
+Working activities/functional abilities
Can be added for little cost because of overlap between CI, depends on
definitions used
conditions covered by CI
Different to IP which pays on temporary or permanent disability
What additional variations to the product design may exist for CI contracts?
Tired benefits
Guarantees/review-ability of premiums/benefits
New diseases/guaranteed inseparability options
Discuss tiered-benefits in the context of CI contracts
For one or more of conditions covered, payment of benefit linked to severity/extent of illness/disease
Features
policy conditions need change, such that policy only terminates once 100% of benefit is paid
further payments made from balance of benefit/sum assured
levels/severity need to be clearly defined
Reasons offered
CI more comprehensive, benefit received at disease levels which would otherwise not receive under standard CI contract
Payments more closely match customer need,
Multiple claims possible, better policyholder satisfaction/retention
Differentiate competitors
Discuss
guarantees/review-ability of premiums/benefits
new diseases/guaranteed insurability options
in the context of CI contracts
Guarantees/review-ability of premiums/benefits
Uncertainty of various CI rates results significant enhancements to reserves
Guarantees=> cover based on contract, as opposed to changing circumstances
(1) may end up covering illnesses no longer critical over time
(2) may end up covering less server incidences of illnesses than assumed in pricing
Windfall claims may be incentive anti-selection
conflict with matching loss to benefit
New diseases/guaranteed insurability options
Needs to be properly costed
May need advice from re-insurers/other parties
Discuss the risks to an insurance company that arise from standard non-tiered critical illness contracts
Prediction of critical illness diagnosis/incident rates due to limited data
Anti-selection, which can be reduced by waiting period/moratorium period
or medical underwriting
Medical technology enhancements may result in selective withdrawals (even when offered as rider benefit)
Expense risk (mostly for standalone contracts)
Investment risk (usually small due to small reserves since it’s a term contract)
Discuss the additional risks to an insurance company that arise from tiered critical illness contracts
Contract design
difficult designing benefit levels/claim trigger levels
..legally and objectively
…to prevent weak definitions which could actually lead to more claims than anticipated
Underwriting risk
Need stringent initial underwriting, cost time/money
because bringing forward claims increases importance of pre-existing conditions
More claim forms/definitions
Claim assessment judgement, since less likely to have market consistent definitions
Pricing risk
limited data, exacerbated by us splitting data into smaller groups changing critical illness diagnosis rates in future ...leading to greater uncertainty => margins => more expensive overlapping between illnesses cross correlation (greater potential for disallowed claims and customer dissatisfaction)
