Ch 2: CI

Question 1

CI definition

Answer 1

• Benefit is typically a lump sum that is payable if the policyholder suffers one of the defined conditions.
• Benefit may be paid in installments with any outstanding amount payable on death, helps better management of finances and reduces fraudulent claims.
• Payout could potentially be used to buy an impaired annuity.
• Product is not designed to indemnify the PH, unlike PMI.

Question 2

Characteristics of condition that make it appropriate for CI product

Answer 2

• Condition is perceived by the public as serious and to occur frequently (serious as in life threatening or at least lifestyle threatening)
• Each condition covered can be defined clearly so that there is no ambiguity at the time of claim. (Definition should as such to ensure that no windfall payments are made)
• Sufficient data are available to price the benefit.
• Extra: Ability to avoid anti-selection

Question 3

Terminal illness condition in CI policy

Answer 3

• Terminal illness is often added to complete the overall cover.
• Does not payout on diagnosis of specific disease but instead involves the severity of a condition and its effect on life expectancy (Eg any condition that is expected to result in a person’s death within 12 months)

Question 4

Reasons for offering tiered CI benefits

Answer 4

• CI product becomes more comprehensive; a benefit is offered at levels of disease progression that would not have triggered payment under a more standard CI product.
• Payments more closely match financial need, reducing the incentive for anti-selection and for “exaggeration” of symptoms at claims stage. (Anti-selection is smaller since those who wish to select would want to maximize their benefits and choose the standard product)
• Multiple claims are possible which enhances PH satisfaction and retention
• Permits insurer to differentiate itself from the market
• It makes comparisons more difficult (and the product potentially more profitable)