1
Q
Overview CI Cover
A
Definition
- product pays out benefit in the form of a lump sum on the occurrence of the insured event.
- lump sum can be used to provide impaired life annuity that provides a regular income from date of valid claim until death
- lump sum can be paid in instalment (tiered benefits), with outstanding amount payable on death if applicable. This can help to reduce fraudulent claims. How?:
- policyholder less likely to commit fraud if they receive small regular amount than a single large payment
- regular payments allow the insurer to monitor claimant and possibly identify fraud
- policyholders might be deterred from committing fraud if they know there will be regular monitoring of claim payment
CI may be considered a hybrid product with a benefit payable in the following ways:
- upon happening of critical illness event
- on reaching a defined degree of impairment (eg losing ability to walk or speak)
- on undergoing a surgical procedure
2
Q
- What are the similarities and differences between CI and IP?
- Who should buy each type of policy?
A
1.
- both provide cash benefits
- IP seeks to indemnify policyholder although not fully as benefits are capped. Insured always suffered some loss as a result of insured event occurring. This is to reduce likelihood of fraud.
- IP provides regular income from end of deferred period until insured returns to work or end of policy term.
- CI provides lump sum chosen by insured and not linked to loss incurred
- Both CI and IP can have benefits and premiums linked to an index
- IP provides cover on repeated occurrences of insured event. Cover and premiums don’t cease until death or end of policy term. Premiums may be waived during benefit payment periods
- CI provides cover for a single occurrence of insured event. Once the SA is paid, cover and premiums cease.
- CI could be seen as an accelerated form of life insurance, whereas IP is more like ill-health pre-retirement pension
2.
- any person that had residual risks
- any employed person as there could be a gap between when sick pay ceases and ill-health retirement kicks in
- self employed would have an immediate need for IP, whether they have dependents or not
- CI suitable for anyone who would consider a lump sum payment suitable, should they become critically ill
- someone with IP might still need CI, although to a lesser extent as benefits partly overlap
- in countries where there is no comprehensive free medical care, people often use CI SA to pay for the treatment needed as a result if a critical illness
3
Q
In which forms can CI be provided?
A
Stand-alone
Where SA is only paid on diagnosis of an insured conditions and no payment on death
Rider
Where SA relating to the CI is paid on the diagnosis of the CO and the SA relating to the death benefit is paid on the death of the life insured
Accelerated
Where SA is paid on the diagnosis of an insured condition or death, whichever occurs first
4
Q
1.Which customer needs does CI meet?
- In what way is IP more comprehensive than CI?
A
1.
- provides an income via annuity when insured can’t work due to critical illness
- benefit can repay mortgage or loan
- business partners can buy CI on each others lives st. when CI arises the benefit can be used to buyout the stake of the partner with a critical illness
- benefit can be used for recuperation
2.
- CU pays a lump sum on occurrence of listed condition, irrespective of actual loss suffered by insured
- IP provides benefit when the insured is unfit to work their usual occupation although other definitions can be used, hence more comprehensive because it tries to compensate for actual loss
5
Q
Simplicity vs complexity
A
simplicity
- Lump sum has a powerful draw on purchasers who are weary of insurers promises to look after them
- differed from IP where insurer has a lot of control on the benefit amount paid out
- benefit payment triggered by diagnosis or procedure. This is very easy to explain and adds attraction of product.
complexity
- the use of different definitions for critical conditions eg heart attack between insurers in the same market due cultural and marketing reasons which can complicate claims acceptance. Although work has been done to standardise the definitions.
- more severe requirements on the condition covered than the usual understanding of the term used in the headline title of the condition can lead to insured not understanding claim conditions. I’m South Africa though layman terms have been developed and are part of the policy quotation documents
6
Q
What conditions are covered by CI?
A
characteristics of insurable conditions
- condition should be perceived by the public to be serious and to occur frequently
- condition should be clearly defined so that there is no ambiguity at the time of claim
- there should be sufficient data available to price the benefit
Major conditions
- Cancer
- Coronary artery bypass surgery
- Heart attack
- Stroke
- Kidney failure
- Major organ transplant
- Multiple sclerosis
ADL are used an an assessment criteria for stroke in SA. Some of these activities are:
- feeding
- dressing
- washing
- toileting
- mobility
- transfer
other conditions
- Alzheimer’s disease
- AIDS/HIV contracted by blood
- AIDS/HIV contracted during occupation
- aorta graft surgery
- benign brain tumour
- blindness
- coma
- deafness
- heart valve replacement or repair
- loss of limbs
- loss of speech
- motor neurone disease
-paralysis/paraplegia
- Parkinson’s disease
- third degree burns
advantages of insurers and reinsures to standardise claim definitions (see notes)
7
Q
What conditions are covered by CI?
Continued
A
Impact of screening and other developments on CI claim costs
- CI claim costs are fixed and only incidents rates affect claim costs ie the more the number of claims the more claims are paid out
- screening is likely to detect more incidents but with a larger portion of these being at an earlier stage that in the past
- these might increase claim incidents and hence claim costs however some of the diseases might be detected at an early stage and hence not qualify as claims
- a secondary effect is that screening may lead to the development of effective treatments that reduce the adverse effects of the insured condition and result in more windfall claims (benefit paid but insured suffers little or no financial or other loss)
Importance of reviewable CI
- what is a critical illness now night not be in 15 years time so in order for a CI policy to continue providing comprehensive cover it must be reviewable every 5 years
- policyholder might be concerned because a review would result in changes in the terms and premium of the policy
- policyholder does not however have to accept the terms and healthy policyholders can selectively withdraw
- this will ensure that insurer keeps increases at a minimum and matches benefits to those offered by competitors
Conditions now covered under CI due to growing popularity of CI and competitiveness of markets
- chronic emphysema
- diabetes
- pre-senile dementia
- rheumatoid arthritis
any condition should be carefully with regards to the desirable characteristics of CI illness
8
Q
What conditions are covered by CI?
Continued
A
Terminal illness
- terminal illness often added to complete the overall cover and does not relate to a specific disease but it’s definition involves the severity of a condition and it’s effect on life expectancy
- cover ensures all conditions that reduce life expectancy are covered although at a late stage
- extent to which terminal illness cover extends cover provided and hence additional costs depends on what other benefits are offered by the product eg:
- for accelerated product the main effect of terminal illness cover is to accelerate the death benefit therefore cost of benefit is small
- for defined term products there may also be a few additional claims towards the end of the policy that will impact costs more significantly
- on stand-alone CI plan a terminal illness benefit is a genuine extra cost as no death benefit is paid so the terminal benefit is a new benefit being provided and hence occurrence of causes of terminal illness will need to be established
Children’s benefit
- a policy on a parent will have a rider benefit to provide similar cover for the life of the insureds children until they are 18 years
- claims on parent policy will not terminate this policy
- cost of benefit low compared to high perceived value to the parents
- early product design excluded disabilities that could have been caused intentionally like 3rd degree burns due to fear of moral hazards. Now only claims resulting from pre-existing congenital defects are typically excluded
9
Q
What are the different CI product variations?
A
Tiered benefits overview
- where for 1 or more CIs covered the payment of SA is linked to the severity of the disease
- thus only a proportion of the full benefit that depends on the progress or extent of illness at time of payment is paid out
- Sliding scale could exist relating to the seriousness of the condition
- further claims can be made if the disease advances and further payments made for SA balance to reflect the increasing impairment
- policy conditions would be changed st the 1st claim does not terminate the policy
- 2nd and subsequent claims from a different or worsening condition would be allowed - the product design would need to specify whether this is the case or not.
- policy terminates once 100% of SA has been paid
- if policyholder claims at highest severity level such that 100% of SA is paid out at once, policy will terminate with that one claim.
- the level of severity and proportions will be stated in policy document using objective medical definitions. There are often for severity levels
- premiums don’t reduce with each proportionate payment - the product design will need to specify whether this is the case or not
Advantages of tiered benefits
- CI becomes more comprehensive as benefit will be paid for less sever conditions that may not have been eligible for a claim under a standard CI policy
- payments, part or whole, closely match a financial need, reducing incentive for anti-selection (pre sale) and for exaggeration of symptoms at claim stage as insured wanting to maximise their benefit will likely choose a standard CI not a tiered one
- Multiple claims are possible which enhances policyholder satisfaction and retention
- allows insurer to differentiate itself from its competitors
- makes comparison more difficult and insurers product more profitable
Disadvantages of tiered benefits
- complexity of product may reduce its appeal to prospective clients - so from a produce design perspective the insure must ensure that sales people understand the product and can explain it to potential clients
- it’s attractiveness will depend on its premium versus the premium of a standard CI covering similar illnesses
- higher margins in premiums due to greater uncertainty
- increased expenses as a medical expert is required to ascertain each tier claim
- complex systems
10
Q
What are the different CI product variations?
Continued
A
Guarantees and reviewability of premiums and benefits
covered in slide 7
New diseases and guaranteed insurability options (GIO)
- GIOs can be used by insurer to extend or restrict cover eg increase benefit by say 25% of original SA when insured gives birth.
- the increase in SA should be restricted to avoid selection
11
Q
Total permanent disability (TPD)
A
- TPD often included with CI product because it complements CI cover despite the difference nature of the criteria for payment
- many CI conditions citied lead to a valid TPD claim and thus there is an overlap between benefits. Hence TPD can he added ti extensive product for little additional costs
- cost of TPD will depend on definition of disability used.
- waiting period is often used before claim is accepted as valid in circumstances where it is difficult to determine if a disability is permanent - insurer will usually maintain a IBNS (incurred but not settled) claims while they wait for the final outcome of the disability to become clear
- if however diagnosis is clear insurers pay the benefit immediately. Definition of disability considers severity of condition and extent of disablement
- this contrasts with CI benefits which are normally paid on diagnosis of an illness rather than to its effect
12
Q
Group CI
A
- will be seen as a valuable benefit by employees and can be used by the employer as part of the overall benefit package to attract and retain staff
- might be bought by a group of employees, trade unions and cooperatives
- can be provided to those employees for which IP is not available including blue collar occupations and is of particular value if TPD cover is included
- key requirements to establish a group scheme are:
- there is a definition of who is eligible for benefits under the scheme
- benefits under scheme are clearly defined by size, definition of valid claim, period of benefit of applicable
13
Q
What are the risks to the insurer under CI?
A
main risk is rate of diagnosis of CI
- limited info available to assess rates of diagnosis
- CI contracts relatively new to all markets
- limited data will mean estimates of historical experience rates are unrealisable/non-existent hence increase insurer’s risk
- issue worsened by insurers covering different illnesses under their CI policies. This makes industry data heterogeneous and so misleading as a basis for any company
- unexpected changes in future rates of diagnosis eg medical advances, also constitute a risk
anti selection risk
- smaller due group than individual contract
- selective withdrawal on standalone and to a smaller extent on rider benefits
Expense and minimal investment risk
- particularly in standalone contracts
- CI has a defined term so the reserves are small and so financial impact of investment risk would usually be small
financial risk from withdrawal
- will occur when the asset share is negative
14
Q
What are the risks to the insurer under CI?
Continued
A
Tiered benefits
problems with designing the benefit levels
- difficulty in defining the additional stages of disease that trigger benefits that are both legally and medically objective and understandable to consumer
- weakness in definitions could result in more claims even if probabilities are as anticipated
problems with pricing benefits
- finding relevant data for pricing is an issue
- finding 4 times as many rates for severity levels and transition intensities between them, for all ages, both sexes and smoker/non smoker will be challenging (this will lead to significant margins in the assumptions making the product prohibitively expensive)
- pricing will be made complex and confusing to insured by the many overlaps between related illnesses
- actuary faced with this problem will prefer the absence of any guarantees, significant margins in assumptions and cooperation with a knowledgeable reinsurer.
- extent of use of margins will be limited by the need to maintain premiums at marketable level
problems with underwriting
- underwriter faced with the prospect that the bringing forward of potential claims situations is going to increase the importance of any pre-existing conditions and change the seriousness of any material disclosure
- claims manager will be faced with more claim forms with complex definitions and policyholder pressure to upgrade to a higher level of benefit
- more expertise will be required by claims manager and it might be necessary to recruit new claims staff to deal with increased workload
- no market consistent approach initially, this means judgement will need to be applied when accepting claims. Poor claims underwriting decisions could lead to bad press about insurer
15
Q
What the capital requirements for CI?
A
- capital requirements for standalone contract or marginal requirements of a rider benefit will be of the same order as for an income protection contract
- insurers will need to set up an adequate financial reserve to cover late notified claims that may arise, up to 10 years after original incidence
- some insurers will attempt to control the risks presented by the late notification of claims by imposing a notification period, st claims submitted after notification period are not eligible for payment.
16
Q
What are the factors influencing the claim experience of CI? (This why would claim experience differ from expected)
A
Diagnosis rate if CI influence by
- medical advances
- changes in lifestyle may reduce risk eg stopping to smoke
- availability of preventative medicine programs facilitating early detection and recovery from co di ruins before they reach claim severity level
whether wording of definition is strict and clear (lose wording will result in insurer paying for conditions not priced)
level of underwriting at policy inception
effectiveness of claims management procedure at claims stage
state of economy (a worsening economy may lead to an increase in fraudulent claims)
Alternative answer
What will result in more claims
Poor initial underwriting
Poor claims underwriting
Lose definitions under tiered benefit resulting in more claims
Underestimation of diagnosis rates
Effect of selective withdrawal of healthy lives
What will lead to lower claims
Medical advances - what was a critical illness then is not now
Screening if it is a benefit
Will lead to early detection of disease
Medication taken earlier
Changes in lifestyle
17
Q
Also see printout in notes
A
F102
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