Chapter 6 CI

Question 1

What are the other names for CI cover

Answer 1

• Dread disease insurance
• Serious illness insurance
• Crisis cash
• living assurance

Question 2

Compare and contrast the cover provided by CI and IP policies

Answer 2

Similarities:
* Both provide cash benefits rather than indemnity for policyholders
* Premiums and payments could be inflation-linked
* CI= sometimes cover extended by use of outcome event like TDP

Differences:
* IP provides regular income from end of deferred period until return to work/end of term BUT CI provides fixed lump sum monetary benefit
* IP= cover for repeated occurrences, CI= cover for only one occurrence, after which cover and premiums cease
* IP= insured event defined i.t.o. outcomes, CI= insured event defined i.t.o causes
* IP is less restrictive
* CI=like accelerated form of life assurance, IP=ill-health pre-retirement annuity

Question 3

What kind of person is CI most suitable for?

Answer 3

• Anyone who would consider a lump sum payment useful should they become critically ill, whether for:
  * repaying debts, replacing lost income, paying for care or treatment
• If the country doesn’t have comprehensive free medical care

Question 4

Describe the structure of a CI benefit

Answer 4

Structure of benefit:
* Stand-alone benefit ( more expensive but flexible and matched need. better)= SA paid on diagnosis or after survival period, no death benefit
* Accelerator of WLA or TA(with a reinstatement period without EoH) SA (less life cover when you are difficult to insure) which could include a reinstatement period after which the life cover is reinstated to its original benefit
* Rider to a policy like WLA
* Could also include a waiver of premium rider

Question 5

List the needs of the customer that a standard CI policy meets

Answer 5

• Income can be provided from the lumps sum via an annuity when individual can’t work as a result of CI
• Benefit can be designed to repay mortgage or other loan
• Medical costs can be funded when CI requires surgery or other expensive treatment
• Business partners can purchase CI policies on the lives of each other s.t. benefits will fund buyout of the stake in the partnership when CI arises
• A change in lifestyle can be funded where necessary to improve claimant’s health
• other needs suggested incl. recuperation after CI
• tax planning
• medical aids like installing specialist equipment
  *\Children’s cover: Policies can include a rider to provide similar cover for the policyholder’s children, which has a high perceived value for parents

Question 6

List the of major conditions covered by a CI product (7)

Answer 6

• coronary artery bypass surgery
• heart attack
• stroke
• major organ transplant
• cancer
• multiple sclerosis
• kidney failure

Question 7

List the non-major conditions that could be included in a CI policy

Answer 7

• Alzheimer’s disease
• HIV/AIDS contracted by blood transfusion
• HIV/AIDS contracted during occupation
• blindness
• coma
• deafness
• loss of limbs
• loss of speech
• third degree burns
• Parkinson’s disease
• paralysis

Question 8

List the extra conditions that with growing popularity of the contract and increased competitiveness are being included in cover

Answer 8

• chronic emphysema
• diabetes
• pre-senile dementia
• rheumatoid arthiritis

Question 9

List the main reasons for offering tiered benefits on CI policies

Answer 9

• product becomes more comprehensive = incl. less severe conditions
• payments more closely match financial need and distress= reduces incentive for anti-selection and exaggerating symptoms(which would increase prems)
• multiple claims possible = more satisfaction
• differentiation = competitive
• more difficult to compare => more profitable

Question 10

List the conditions/diseases that could be included in a CI product

Answer 10

• major conditions= cancer, stroke, heart attack, kidney failure, major organ transplant, coronary artery bypass surgery, multiple sclerosis
• non-major conditions= diabetes, paralysis, HIV/AIDS(occupation or blood transfusion), coma, loss of limbs, loss of speech, deafness, blindness, third degree burns, Alzheimer’s, Parkinson’s disease
• terminal illness
• TPD (occupation-based, related to ADLs, working activities or functional abilities)

Question 11

List the additions to benefit that can be offered

Answer 11

• children’s benefit
• GIO= every 5th, 10th and 15th
• increased SA whenever qualifying event listed occurs like child birth
• TPD or loss of independent existence(offered on life basis)
• Terminal illness

Question 12

List the risks to the insurer that CI policies pose

Answer 12

• Lack of data (also bc of lack of market consistency) => parameter risk
• Medical advances => increased life expectancy, early detection of CI which could reduce claims for serious stuff, prevention, detection could also increase claims before end of policy term
• anti-selection risk = waiting period and medical underwriting
• selective withdrawals (especially when ASt is negative)
• expense risk
• minimal investment risk
• marketing risk from claims disputes, weak definitions
• late notifications of claims
• moral hazard (managed through tiered benefits)

Question 13

What are the three key characteristics an illness or condition should possess to be appropriate for critical illness (CI) cover?

Answer 13

• Perceived as serious and frequent: The condition must be perceived by the public as serious and occurring with reasonable frequency. If not life-threatening, it should at least be lifestyle-threatening. Public perception can sometimes be disproportionate to actual incidence, influenced by awareness campaigns or media.
• Clearly defined: Each covered condition must be capable of being clearly and unambiguously defined using objective medical criteria to prevent disputes at the time of claim. This often necessitates complex medical terminology.
• Sufficient data for pricing: Adequate data must be available to accurately price the benefit, both currently and in the future. This is often challenging due to the relative newness of CI products and the difficulty in predicting future medical advancements

Question 14

What is a moratorium period in the context of critical illness insurance, and why is it used?

Answer 14

A moratorium period is a specified initial period at the start of a critical illness contract (e.g., six months) during which the diagnosis of a critical illness will not qualify for benefit
Purpose:
◦ To reduce anti-selection risk: It helps counter situations where an insured might know they are at a higher risk for certain conditions (e.g., due to occupation) than the insurer’s underwriting procedures might detect. This asymmetry of information is a form of anti-selection.
◦ It ensures that claims are for conditions that developed after the policy commenced, rather than for pre-existing or immediately foreseeable conditions that were not fully disclosed.

Question 15

Describe two major health care risks that are not covered by CI insurance

Answer 15

• Minor illnesses or injuries that prevent working
• Actual medical costs incurred

Question 16

What were the advantages to insurers and reinsurers of cooperating to produce standardized claim definitions for critical illness policies?

Answer 16

• Reduced ambiguity and disputes
• Improved data collection and pricing
• Enhanced consumer trust
• Standardised definitions can simplify initial underwriting and claims processing by providing clearer criteria for assessment.
• Common definitions make it easier for reinsurers to assess risks and provide cover consistently across different insurers.
• Fairer market: It promotes a fairer and more transparent market by reducing differences between insurers based on opaque or varying definitions.

Question 17

Describe the possible impact on critical illness claim costs of increased use of screening programmes

Answer 17

• Increased Incidence of Diagnosis (Initially) => increases claim costs
  ◦ Reduced severity of claims => lower average cost per claim
• Improved survival rates => reduces TI claims
  Advances might challenge existing CI definitions. If early-stage conditions (now detected by screening) are considered “critical illnesses” under current definitions, it could increase claims. Insurers might need to refine definitions to ensure they still target “serious” conditions that significantly impact lifestyle, potentially limiting payouts for very early-stage diagnoses

Question 18

List the desirable characteristics of a critical illness condition with regard to its suitability for cover under a CI insurance contract.

Answer 18

• Perceived seriousness and frequency
• Clear definition
• Sufficient data
• Avoid anti-selection

Question 19

Suggest how the terms and conditions of a CI policy might be amended so that the same range of illnesses and procedures were covered, but the problems highlighted by windfall claims
are avoided

Answer 19

• Implement Tiered Benefits/Severity-Based Payouts
• Refine Definitions to Specify Severity
• Introduce Sub-limits or Capped Benefits for claims prone to windfall claims
• Focus on Outcome-Based Triggers (Impairment)
• Regular Review of Conditions and Definitions

Question 20

Explain the effect that medical advances might be expected to have on future critical illness rates.

Answer 20

• Increased Incidence Rates (Early Detection)
• Reduced Severity and Mortality
• Changes in Definitions and Windfall Claims
• Emergence of New Condition

Question 21

Factors that influence claims experience for CI benefits (9)

Answer 21

• Diagnosis rates for the conditions covered under the critical illness benefit, this is influenced by:
  *Medical advances may allow for more reliable diagnosis of certain illnesses or more routine operations.
  *Changes in lifestyle of policyholders that may influence the risk of having a medical condition.
  *For example, an increase in policyholders who stop smoking may reduce lung cancer diagnosis rates.
  *Availability of preventative medicine programmes, facilitating earlier detection and recovery from conditions before they reach the level of severity required for a claim.
• Whether the wording of claims definitions is strict and clear, loose wording of claims definitions may result in the insurer being forced to pay for medical conditions that were not priced in the product.
• Level of underwriting at the inception of the policy.
• Effectiveness of claims management procedures at the claims stage.
• State of the economy, as a worsening economy may lead to an increase in fraudulent claims

Question 22

Outline the key differences between tiered benefits CI products and conventional CI products, in terms of product design (11) and pricing requirements (4)

Answer 22

Product design differences:
For tiered benefits to be paid the benefit design will require different levels of severity to be specified.
Each level of severity will have its own level of cover.
Each level of severity will require its own claims definition.
Under the existing product a claim will result in termination of the cover.
Under the new product a claim will not result in termination of cover, unless a claim is made at the maximum severity for the full sum assured.
The new product design will need to specify how cover is reduced/reinstated after a partial claim.
The new product design will need to specify what happens if a mild condition progresses into a more serious one.
The new product design will need to specify whether there will be any reduction in premium after a partial claim has been made.
It is likely that the insurer will be liable for a wider range of claims under the new product since policyholders can claim for milder conditions than would be valid under the standard lump-sum product. Therefore, the insurer should consider implementing stricter underwriting requirements for the new benefit.
The insurer will need to ensure that its salesforce is well equipped to explain the new design to consumers as it is more complex and may lead to policyholder dissatisfaction if they do not fully understand the product.

Pricing differences:
The current product requires an incidence rate per condition by age.
The new product will require an incidence rate per condition, per severity by age.
The administration of the new product is likely to be more onerous and therefore may require a higher administration expense assumption.
There is likely to be more uncertainty in the expected claims experience of this new product, and therefore higher margins may be required in the pricing basis for the new product.