Critical illness

Question 1

Needs met by the CI cover?

Answer 1

(1) Lumpsum can be used to purchase an annuity for income provision due to inability to work given their CI condition.
(2) The lumpsum can be used to repay a mortgage or other loan when the p/hs health is in question following their diagnosis.
(3) To fund medical costs when the CI requires expensive treatment or surgery.
(4) Keyman cover: Can be used by business to buy-out the diagnosed partner’s stake.
(5) To fund a change in lifestyle to improve the claimant’s health.

Others
(6) To aid with recuperation after illness
(7) To aid with taxation planning
(8) For medical aids

Group CI needs
- part of the reward package for employees
- Same as the IP principle

Question 2

Complexity of the CI product

Answer 2

The insured events
- More difficult to define and validate than the event of dying.
- Thus, the wording of the policy is very important.
Understanding the claims conditions
- The definitions may vary thus complicating claims acceptance, unless they are standardised then it may be simple.
- More severe requirements on the condition covered than the colloquial understanding of the term used in the headline title of the condition.

In addition the product would be subject to
- exclusions and
- point-of-claim underwriting.

Question 3

Explain how CI policy is simple

Answer 3

So Cl is a theoretically simple product. This is part of its attraction to consumers.

• The lump sum payout — which cannot subsequently be withdrawn by the
  insurer — has a powerful draw for purchasers who are wary of insurers’ promises to look after them.
• The claims trigger of diagnosis or procedure is easy to explain and adds to the attraction of the product.

Critical illness insurance attempts to overcome some of the complexity of other health-related products by
- providing a fixed sum insured on certain pre-defined events.

Question 4

How does the benefit payment of a CI differ from that of IP

Answer 4

(1) The lump sum payout — which cannot subsequently be withdrawn by the
insurer — has a powerful draw for purchasers who are wary of insurers’
promises to look after them.

This contrasts with an IP policy where the benefit stops on recovery and a partial recovery might result in the insured working part-time and receiving a
proportionately reduced benefit.

Question 5

Characteristics for insurable conditions ( 3)

Answer 5

• serious and has frequent occurrence according to the public
• Can be clearly and unambiguously defined to avoid conflicts at claiming stage
• Sufficient data available on it to price

Question 6

Advantages of standardising condition definitions (12)

Answer 6

• use of experienced insurers and experts

Free of ambiguity thus
- claims are settled quickly and
- there are fewer disputes as a result lower reputational damage and legal expenses

Easy to understand policies for customers and sales staff

Easy to make comparisons as well.

Easier to make use of industrial data
- Better info for insurers to assess risks
- Lower risk loadings and lower premiums
Thus potential increased size of the market

Industry wide info and education makes it easy to understand the condition definitions
- Resulting in increased sales in general and better for those with better customer services

Question 7

Disadvantages for using standardised definitions

Answer 7

• Definitions need to be reviewed frequently, this may be costly.
• Need to educate prospective p/hs and train staff
• Competition is on additional conditions, price and quality ( extent of cover)

Question 8

List the major conditions covered by CI with the first four being in SA

Answer 8

• Cancer
• Heart attack
• Stroke
• Coronary Artery By-pass Graft
• Kidney failure
• Multiple sclerosis

These are the conditions that together account for the majority of the CI claims

Question 9

Assessment criterias for the conditions

Answer 9

ADLs
Bowel movements
Stairs

Question 10

Why offered Tiered benefits

Answer 10

• CI products become more comprehensive
• partially or fully match payments to the medical distress and financial need
  
  • reduces anti-selection risk
  • moral hazard risk reduced (reduce symptom exaggeration at claims stage)
• Multiple claims enhance customer satisfaction

Allows insurer to differentiate itself from its competitors
makes comparison more difficult and thus can be a potential profitable point

Its complexity may reduce its attractiveness and may result in a higher degree of disputes.

Question 11

Guarantees and reviewability of premiums and their implications

Answer 11

• Due to uncertain future risks, the premium may be reviewable.

Guarantees
- They may still be guaranteed premiums or guarantees on benefits.
- But still have to charge for these.
- May require significant reserves
- May be forced to continue coverage despite medical advances making the conditions no longer critical/ less severe and thus resulting in windfall claims.
- This can cause anti-selection problem as benefit can outweigh the medical cost or the longer term damage to the quality of life.

New diseases and Guaranteed Insurability options may be offered.

Question 12

Tiered benefits features

Answer 12

• Payment of the Sum assured is linked to the severity of the disease.
• For one or more illnesses covered
• Further claims may be made if disease advances
• Premiums do not typically reduce with proportionate payment.

Question 13

Explain the sufficient data available to price as a characteristic of insurable conditions and its difficulties.

Answer 13

clearly defined conditions
- not easy as the benefit structure nature leads to the use of complex medical terminology
- To avoid windfall payments
- Definitions may be reviewed from time to time.

Sufficient data to price
- To price each CI accurately, now and in the future.
- consider the impact of the condition overall
- it is more difficult for new conditions as they need more time to build-up
- If population-wide data is available about incidence of new conditions it may be heterogeneous.
- difficult to estimate the effect of advances in preventative medicine on future incidence rates.

serious and frequency by public perception
- public tend to fear some diseases out of proportion of the actual incidence.
- The illness has to lifestyle threatening to be included and
- it should not be rare such that it can be neglected.

Question 14

Explain the clearly defined conditions point as a characteristic of insurable conditions and its difficulties.

Question 15

structural basis

Answer 15

without-profits, unit-linked.

Question 16

What are the requirements to establish a group contract?

Answer 16

• To define the eligibility criteria
• to define the benefits by size, valid claim, period of the benefit.

Question 17

list Problems categories with tiered benefits

Answer 17

designing benefit levels
pricing
underwriting

Question 18

what are the problems faced in designing benefit levels for CI?

Answer 18

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