CRITICAL ILLNESS INSURANCE

Transcription

1 CRITICAL ILLNESS INSURANCE M Münchener Rück Munich Re Group

2 CONTENTS

3 Introduction 3 Part I: The product 4 1 The concept of CI insurance 5 2 Product design 10 3 Pricing 18 4 Medical underwriting of CI covers 23 5 Claims considerations 26 6 Reinsurance of CI covers 28 Part II: Recent developments and experience in selected markets 30 7 South Africa 31 8 United Kingdom 36 9 Canada Australia Southeast Asia 45 Final remarks 48 References and sources 50 Appendices 51 1 Specimen definitions 52 2 Deriving incidence rates 54 3 Sample crude incidence rates 58 4 Sample net premium rates 59 5 Specimen policy conditions 62 6 Checklist for the application form 64 7 Specimen claimant s statement 65 8 Specimen physician s statement 67 9 Actual fraud case 69 1

4 INTRODUCTION The rapid progress made in medical science and clinical examination methods during recent years and decades means that doctors can diagnose and treat many life-threatening diseases much earlier nowadays. Thanks to such developments, many lives have been saved. However, the financial burden for the people affected and their families can still be extremely painful. Many serious illnesses can only be cured using state-of-the-art and highly expensive forms of therapy. Rehabilitation and the sudden changed circumstances caused by serious illness also exact a high price. Health insurance is dominated by the principle of cost reimbursement for medical treatment and rehabilitation. Patients are rarely free to choose their own doctor or form of therapy, with only private insurers offering such an option. Health insurance thus only partially covers the financial consequences of a serious illness and does not normally address the problem of consequential costs for changed circumstances and rehabilitation. As traditional life and disability insurance policies generally have a different focus, very few insurers in the past were willing to cover the needs of the seriously ill. However, this gap has been filled over the last twenty years or so, as a new form of cover has been developed and established in many markets which provides for payment in the event of a serious illness occurring. In this publication, such products are referred to as critical illness (CI) insurances. This publication is divided into two parts: Part I is intended to provide comprehensive product information on CI insurance. The first chapter presents a general overview of the subject. Chapters 2 to 6 look at specific aspects, such as underwriting and rating, related to product design. Part II deals with recent developments in selected markets around the world. The appendices include a collection of valuable product information such as recommended CI definitions, specimen policy conditions, specimen claimant s statement, specimen physician s statement. Furthermore, an illustration of how to derive a sound actuarial premium basis is given and sample net premium rates are provided. The final appendix presents a real fraud case from South Africa, pointing out that prudent product development and efficient product management are of prime importance for companies involved in the CI market. 3

5 PART I THE PRODUCT

6 1 THE CONCEPT OF CI INSURANCE 1.1 INTRODUCTORY REMARKS CI insurance first emerged in South Africa in 1983 and was known as dread disease insurance. However, such policies had been sold earlier in the USA and provided benefits for certain types of cancer. These cancer policies are generally regarded as the pioneer products of CI insurance. It did not take long for CI insurance to spread from South Africa and nowadays it plays an important role in many markets throughout the world, particularly in the UK, Canada, Australia, South Africa, East Asia, and Israel. CI covers pay an insurance benefit if the insured person suffers a serious condition (depending on the definitions stipulated in the policy wording) such as cancer, heart attack (myocardial infarction), stroke, coronary artery (bypass) surgery, kidney failure (renal failure). The number of diseases covered varies considerably depending on the market and provider concerned. Appendix 1 provides an overview of the most important insured diseases. CI insurance covers against the financial consequences of a serious condition. People affected are given financial support to enable them to better manage their changed circumstances of life. Besides the original South African term of dread disease insurance, many markets today now refer to such cover as critical illness insurance, crisis cover, trauma cover or living insurance. The reason for this is that the term dread disease is considered too drastic in many markets and unsuitable for marketing purposes. Also, many CI products are no longer restricted to cover of life-threatening diseases but provide financial protection 5

7 against a variety of critical situations. The survival character of this form of insurance thus plays a more prominent role nowadays. As mentioned in the introduction, this publication uses the term CI insurance to cover all of the above possibilities. For some years now, a steady increase in the number of diseases covered under CI products has been observed in many countries. Many life insurers hope that extending cover will help them gain a distinct advantage over more restrictive competitors. CI covers are available in both individual and group business. In young insurance markets in particular, group business initially often has greater significance than in more developed markets. This publication deals primarily with individual CI business. The particular features of group business (risk assessment, free cover limits, rating, various coverage options, etc.) are not addressed in this publication. 1.2 MARKETING CONSIDERATIONS CI insurance is suitable for people whose social insurance provides inadequate coverage against the high costs that can arise in connection with a serious illness. This is frequently the case in countries which have limited state social security systems. However, even if a comprehensive health system exists, many people who become seriously ill may want to have the additional financial independence that allows them to afford the best medical treatment (e.g. in a private clinic or abroad). Additional burdens do not necessarily have to be connected with high medical costs. For example, a seriously ill person may see his circumstances change to such an extent that the house or apartment may have to be remodelled to meet the needs of disabled persons. Alternatively, it may suddenly be necessary to obtain a car in order to maintain mobility. There are many circumstances which could trigger the need for additional funds. A serious illness may reduce a person s long-term ability to work. For this reason, the benefits under a CI policy are also used to pay off debts from consumer credits or mortgages (credit life insurance). The above arguments clearly show that there are close links between CI insurance, health insurance and disability insurance. CI insurance should therefore be embedded in a comprehensive security concept for the client, who first has to undergo an individual needs analysis. In this way, sales arguments can be presented in a convincing and professional manner. A more detailed approach to the principles of marketing CI insurance is provided in Munich Re s publication The Marketing of Critical Illness Insurance. 6

8 1.3 PRODUCT DESIGN CI insurance usually takes the form of a rider offered in combination with a life policy. The underlying or main policy may, for example, be a term or an endowment policy. Stand-alone CI policies are offered in certain markets but have been of only minor importance to date. A basic distinction has to be made between two types of CI insurance: The first and most common form of cover provides only a prepayment on the sum insured of the underlying policy (acceleration benefit). The second form provides for additional benefits without affecting the life sum insured of the main policy (additional benefit). With traditional products the benefit under a CI policy is usually only paid out once, after which the insurer s liability ends. There are increasing indications that in some countries health and accident insurances are being extended to cover elements of CI insurance. Conversely, CI products increasingly include disability and long term care cover. Although this may appear logical, it is too early to talk of a convergence of the various product lines. In this connection, the general trend towards target group rates should be mentioned. There are now tailor-made products, for example for women or young people, which are specially designed for the insurance needs of the group concerned. For example, women s products in Hong Kong are very popular. These policies offer not only life and health cover but also insurance cover for specific critical illnesses, which focus cover on typical women s illnesses such as breast cancer. In addition to these coverage concepts, there are also other variations and options, which will be dealt with in Chapter POLICY CONDITIONS Each occurrence of a covered condition must be confirmed by a registered medical practitioner appointed by the insurance company. The diagnosis of critical illness must be supported by clinical, radiological, histological and laboratory evidence acceptable to the insurer. Apart from the normal exclusions applied in life insurance, self-inflicted injury, alcohol or drugs abuse and diseases as a result of an HIV infection should also be excluded. Because of difficulties in obtaining medical evidence for a critical illness in some countries, the insurer should have the right for the purposes of claims assessment to send the insured to a country which should be reasonably accessible for the insured. In South Africa companies have experienced clear-cut cases of antiselection. For example, persons suspecting the imminence of a serious illness have applied for a CI policy without having first sought medical diagnosis. Precautions against such antiselection include a provision in the policy stipulating a waiting period. This waiting period can vary according to the disease concerned, but is usually between two and six months. Insurance cover only comes into effect after this waiting period has expired. If the CI insurance provides for an additional benefit in the event of a critical illness, the waiting period should be accompanied by a survival period. If a critical illness occurs, the 7

9 insured has to live until the end of the survival period before benefit is paid. Depending on the illness, this survival period may only last two weeks, but a month is the standard period. 1.5 MAXIMUM BENEFIT LEVELS The sum insured should be appropriate to meet the expected financial needs in the event of a critical illness. The general principle also applies here that the insured should not be financially better off than before the CI occurred. A limitation of the sum insured also helps to limit antiselection. This is one of the main reasons why the maximum permissible sums insured are lower than in life insurance. However, in case of key-person covers, the benefit levels may be substantially higher. 1.6 AGE LIMITS The maximum age at entry is frequently 55 years and the age at maturity is usually 65 years. However, this can vary from market to market. High ages at maturity are not recommended, as the statistical data for these ages are less reliable and greater variability of claims from year to year would be expected. Higher ages at maturity can be considered in the case of prepayment of a whole life or endowment policy, as the sum at risk with such policies will be relatively low in the later years. Moreover, it is likely that older people suffering from a critical illness will die in direct consequence. 1.7 PRICING Determining incidence rates is difficult for a number of reasons. In many countries there is a lack of reliable statistical data which can be used for the purposes of rating, and geographic and socio-economic factors in different countries also affect the CI risk in different ways. This results in a significant risk of error. There are also considerable uncertainties in evaluating the risk of antiselection (moral hazard) and the positive effects of risk assessment. Fundamental problems have to be tackled in the rating of CI covers. For example, the rapid progress in medical and diagnostic science also significantly influences the incidence rates of various critical illnesses. If one takes cancer as an example, modern findings of cancer research make early detection of this serious disease a lot easier. This inevitably leads to higher incidence rates of cancer. Another example is the cover of coronary artery surgery. Less drastic and more efficient treatment techniques allow surgery to be used more frequently than used to be the case. This trend also means that statistical experience becomes out of date a lot sooner. All in all, it should be noted that the actuarial bases for CI harbour a great risk of change. These rating risks make it prudent not to grant premium guarantees lasting more than five years. For the same reason, single-premium cover should only be offered with an appropriately short policy period. 8

10 1.8 UNDERWRITING CI is exposed to a high risk of antiselection: Attaching a CI rider to a life insurance might lead to a significant increase in the insurance premium. Non-disclosure is easy. As CI is a living benefit, people who feel particularly prone to the diseases covered are more likely to apply for such insurance. Consequently, application forms are more comprehensive than in life insurance and contain standard questions on smoking habits and family history. The non-medical examination limits are also different to those in life insurance and are set at a lower level. Statements of attending physicians are very important if applicants request a sum insured which is above the non-medical limits. The underwriter must also have a thorough knowledge of the diseases covered and be able to assess their interactive effects. 1.9 REINSURANCE Given the risk involved in a CI product, many life insurers seek reinsurance support for their CI portfolios. The risks of error and change are of major importance in this respect. The predominant forms of reinsurance are quota share and surplus agreements with retentions lower than in life reinsurance in order to reflect the greater factor of uncertainty involved with this product SUMMARY In summary, it can be said that CI insurance constitutes a suitable addition to the range of products offered by a life insurer. The success of this product is there for all to see. Naturally, the different parameters in various markets and the specific interests of each life insurer require individual product solutions. CI insurance offers a wide range of possibilities in this respect. CI insurance is a complex and demanding product. The insurance conditions have to be defined very carefully. Special care should be taken to ensure that the range of benefits is presented to the insured in a transparent and easy-to-understand way. At the same time, the medical definitions of illnesses must be of a high quality in order to guarantee objective assessment of claims. Efficient risk assessment and claims processing are also of major importance in ensuring the success of a product. An example of an actual fraud case from South Africa is provided in Appendix 9 in order to demonstrate the risk involved when offering these living benefits. 9

11 2 PRODUCT DESIGN 2.1 TYPES OF COVER CI covers may take a variety of forms, two main ones being distinguishable. They can be characterized as follows. Prepayment or acceleration benefit The usual form is a rider to a life insurance policy providing for full or partial prepayment of the death benefit in the event of a CI claim. The CI sum insured is then paid out as a lump-sum benefit. The amount of CI benefit is given as a percentage of the life sum insured. This percentage is often 100% or 50%, but can also be fixed at any other value. As soon as the CI benefit has been paid, the sum insured under the main policy is reduced by this amount and at the same time the premiums to be paid decrease accordingly. There are also life insurance policies which directly include CI cover (i.e. there is no CI rider as a legally independent contract). However, CI covers are often linked to a life rider and a prepayment for CI then refers to the sum insured of the life rider and not to the underlying policy. An example of this is an endowment insurance which is extended by a term and CI rider. If a critical illness occurs, a prepayment on the sum insured of the (term) rider is made and the endowment policy continues. There are many variations here and product developers make every use of them. Additional payment or stand-alone benefit rider In the event of a CI claim, an additional benefit is due, with the underlying main insurance continuing unaltered. As a rule, the CI benefit is paid as a lump sum. However it is also possible to arrange payment in three to five instalments. For such cover the insured must survive a short period of time to trigger the claim (see survival period). 10

12 Worldwide, most CI products are still offered with a prepayment benefit in combination with whole life, term or endowment insurances. However, each of the two main forms has its special advantages. a) Prepayment: The covered diseases of a CI insurance belong to the main causes of death. Therefore, under a prepayment type of cover, a CI claim represents a benefit which would most probably have had to be paid at a later time anyway. For this reason in particular, prepayment covers are less susceptible to incidence rates which are set too low. Another advantage is that the reserve of the main policy may be used to pay out the CI benefit, as this reserve is released in the same proportion as the main insurance is reduced. This item is of importance especially under endowment and whole life policies as substantial reserves are available here towards the end of the duration. If the total life sum insured (e.g. only 50%) is not paid out under the prepayment product, the insured is still covered for death following a CI claim. b) Additional payment: If there is a demand for comprehensive provision for dependants, it may be useful to have the whole sum insured maintained for death even after CI benefits have been paid. Additional payment products do this. Besides, they have the advantage that they can be bought in the form of modules to go with various types of cover, possibly even subsequently. The premiums under an additional payment product are affected by the duration of the agreed survival periods. As a consequence, assessment of a claim becomes a more tedious task. A decision for or against a prepayment or additional payment solution should be made in consideration of the actual insurance demand. In this context, it should be noted that the inclusion of an additional payment benefit leads to higher premiums than the inclusion of a prepayment cover. Specimen policy conditions for a prepayment contract, together with the necessary amendments required for an additional payment contract, are contained in Appendix 5. In addition to these main forms, there are other types and options which, however, are not yet of any major importance. Stand-alone cover This is a stand-alone CI cover which is not combined with any underlying life insurance. Otherwise, benefits correspond to those under the additional payment product. However, there are some complications. If the insured dies from a CI within the survival period, no benefit is paid. This will be difficult to understand for the beneficiaries if the death is close to the end of the survival period, as no separate death benefit becomes due. This may lead to client dissatisfaction and a loss of image for the insurer. 11

13 Waiver of premium As soon as a CI occurs, premium payment ceases under the underlying main insurance. This type of cover may be a valuable extension to additional benefit policies and to those prepayment policies granting only a partial payment of the life sum. Otherwise, the premiums for the main insurance would continue to become due after receipt of a CI benefit. In order to calculate a waiver of premium cover on a sound actuarial basis, it is necessary to assess the survival probability of the person suffering from a CI condition. However, this usually fails due to the lack of reliable statistics which would permit a sound analysis of the mortality of the seriously ill. This means that rough estimates will have to suffice for pricing a waiver of premium cover. Options Reinstatement of CI cover Since the end of the 1980s, additional payment products have been offered in South Africa with the option to reinstate, after a CI claim, the cover for CIs not yet claimed (reinstatement of CI cover). If, for example, the insured has a myocardial infarction, he can be granted insurance protection against cancer or organ transplantation. This cover, however, has been considered too expensive and has practically no significance today. Reinstatement of life cover (or buy-back option) If a prepayment policy is sold with a buy-back option, it is possible after a CI claim to build up the death benefit gradually. For example, the conditions can be worded so that the remaining life sum insured is reinstated by 25% of the prepaid sum after a survival period of two years. After further years of survival, additional increases may be made in the sum insured. The advantage for the insured is that this option grants an additional cover at the conditions applying on writing the original policy. However, the current age is the basis for the calculation of the premium for the reinstated life cover. The additional premium for this option is around 10%, depending on the length of the agreed survival period. The additional expenses are normally not very high as many insureds affected by a CI die before the end of the survival period and thus can not exercise the buy-back option. Child and juvenile covers Children and juveniles are now frequently included in their parents CI cover. This can be offered as an automatic element of insurance cover or as an optional extra. The main difference is that automatic cover stipulates that all policyholders pay a minimal premium for the child insurance element even if they do not have any children. The second option requires policyholders to pay an additional premium for each child included in the cover. For obvious reasons, the diseases covered under child and juvenile insurance (e.g. meningitis, poliomyelitis) may differ from those in the adult s policy. 12

14 2.2 DISEASES COVERED MEDICAL ASPECTS In addition to marketing aspects, important factors of a CI product concept will be determined by technical and medical circumstances. Underwriting and medical considerations make three basic conditions for the cover of a CI necessary. The CI definition must be sufficiently precise that the existence of a claim can be reviewed objectively and clearly. It must be possible to price the covered conditions on a sound statistical basis. The CI product should as far as possible be immune against the risk of antiselection. The first condition can be met by calling in medical experts. The problem of good disease definitions is explained below, based on the example of heart attack (myocardial infarction). a) The definition recommended by Munich Re is as follows: The death of a portion of the heart muscle as a result of inadequate blood supply to the relevant area. The diagnosis for this will be evidenced by all of the following criteria: a) a history of typical chest pain b) new electrocardiogram changes c) elevation of infarction-specific enzymes Non-ST segment elevation myocardial infarction (NSTEMI) with elevation of troponin I or T is excluded. By measuring elevations of troponin the death of even 1 gram (!!) of the heart muscle can be evidenced. Those events would not mean a substantial handicap to the patient, but may nevertheless be called myocardial infarctions. b) A definition accepted by Munich Re is as follows: The death of a portion of the heart muscle as a result of inadequate blood supply to the relevant area. The diagnosis for this will be evidenced by all of the following criteria: a) a history of typical chest pain b) new electrocardiogram changes c) elevation of infarction-specific enzymes. This definition is problematic as it may be debatable as to whether those NSTEMI are covered or not. Reading this definition it could be argued that a NSTEMI is excluded since the condition b) is not fulfilled (because there is no electrocardiogram change of the ST segment). But to make clear to insureds what kind of infarcts are really covered under their CI product and to avoid misunderstandings, definition i) is recommended. 13

15 c) The following definition is rejected by Munich Re as being inadequate: The death of a portion of the heart muscle as a result of inadequate blood supply to the relevant area. The diagnosis for this will be evidenced by all of the following criteria: a) a history of typical chest pain b) new electrocardiogram changes. This definition is unacceptable insofar as there are acute heart attacks accompanied by short-term pain and ECG changes, but with no effect on the blood values. This would mean that heart attacks which are not yet myocardial infarctions would be accepted as claims. Specimen definitions of the eleven most frequently covered CIs are contained in Appendix DISEASES COVERED EXTENSION OF COVER Besides checking possible CIs in respect of the above three basic conditions for coverage, the insurer has to decide how many CIs a product should include. The insurer has to select a basic cover (three to six CIs) or an extended one with 15 or even more CIs, or something in between. When coverage is only basic cover, e.g. for the Big Three (i.e. cancer, heart attack and stroke), people tend not to be concerned about being covered for other conditions. When the number of covered conditions is expanded from the Big Three, then people begin to focus on what is missing from the policy. Furthermore, the underwriting and claims handling of extended CI covers is more complicated and therefore more expensive for the insurer. In particular, extending the cover to special surgeries (e.g. bypass surgery, angioplasty) creates problems, because those CIs are to some extent elective. People with insurance for such surgeries will be less reluctant to undergo that operation than others. Further, it calls into question whether some of these CIs should be called critical conditions at all. If it is not possible to launch a cover without such conditions, reducing the benefit for those surgeries would be one possible solution to the problems. Instead of extending the CI cover by more and more CIs, an alternative way to round up the CI cover would be to include total and permanent disability (TPD) and/or loss of independent existence (LIE) as benefit triggers. TPD could be defined as the inability to ever perform any occupation. However, as experience in the UK shows, such definitions are not readily understood by policyholders, leading to high declinature rates for TPD claims (above 50% in 1998). LIE could be defined as the permanent inability to perform at least three of six activities of daily living, similar to the policy conditions of long term care insurance (LTC). 14

16 Also seen in some markets is the inclusion of terminal illness (TI) as a further coverage. TI is defined as any condition that is expected to result in the death of the life insured within a short period of time (6 or 12 months). Where the TI benefit is part of an acceleration CI policy and is well defined, it may be a suitable cover. The cost would not be significant given that the vast majority of predictable deaths result from cancer. The benefit cost (interest on early payment of sum insured and some premium shortfall) will be small in relation to the sum insured as a whole. TI is not at all suitable with additional or stand-alone types of CI product, which are designed as living benefits. In this case the TI cover would be a kind of additional death cover. Even the stipulation of a survival period would involve problems, because it may often be very difficult to determine when a terminal illness commenced. 2.4 INSURANCE TERMS AND CONDITIONS Limited benefits When CI covers were first introduced, only rather limited benefits were offered under the rider. In South Africa, the CI sum insured was limited to SAR 25,000 or 25% of the life sum insured at the beginning. At the time, this amount was the cost of a bypass operation in South Africa. In the course of time, maximum benefits substantially increased in some markets. In the UK for example, current CI benefits can be up to 1m and even more. An insurance company intending to introduce a CI cover is recommended not to offer excessive benefits. High covers should only be granted following careful financial underwriting prior to policy issue. In this context, not only existing covers under CI policies, but also any other policies for disability, medical costs, etc. should be considered. Reasonable maximum sums insured are in the range of US$ 200,000 and should not exceed five times the insured s net annual income. As mentioned in Chapter 1, however, the sums insured for a key-man cover may be markedly higher. Here the CI policy serves to balance the financial disadvantages to a medium-size company arising from the fact that a key employee falls ill with a CI. The benefits under the CI insurance are paid directly to the company. Age limits The risk of antiselection grows with increasing age at entry and cannot be completely eliminated, not even by a complex risk underwriting process. Therefore, a maximum age at entry of 55 years appears reasonable. As a rule, CI covers end at age 65, due to the fact that upon reaching retirement age the insured does not have to fear any loss of income in the event of a CI. At older ages, long term care costs often arise from serious illnesses, and such costs can better be covered under a long term care (LTC) insurance. There are, however, also other, more technical reasons not to fix the age at maturity too high. CIs are subject to a substantial risk of change in the course of time. As older people 15

17 run a higher risk of contracting a CI than younger ones, deterioration in the risk experience has a stronger effect on the result. In addition, the database for older ages is not very broad, so that the CI risk cannot be assessed as reliably as for younger ages. Nevertheless, some markets, e.g. the UK, offer CI covers even up to older ages at maturity. If the benefit is an acceleration of a life insurance benefit and the underlying basic insurance is an endowment or a whole life policy, such covers may perhaps be justified, as the sums at risk decrease at older ages owing to the savings character of the insurance. Moreover, many older people die from a CI, so that the high CI risk is balanced in part by the death risk. Waiting period Taking South Africa as an example, Chapter 1 described the risk of antiselection. Early claims in particular were often connected with non-disclosure in the proposal. However, this problem has been tackled by introducing a waiting period. In the meantime, it has become customary to agree on a waiting period at the inception of an insurance contract, so that protection becomes effective at a later date. However, the insurance company may abandon the application of the waiting period if the CI results directly from an accident. This waiting period should in general not be shorter than three months. It is also conceivable to fix it differently for each disease, e.g. six months for cancer and multiple sclerosis and two months for other CIs. However, marketing aspects make this difficult to enforce. Survival period For additional payment CI insurances, it is absolutely essential to agree on a survival period. The survival period is the period after commencement of a critical illness, during which the insurer is not yet liable to pay. This means that if the insured dies within the survival period, no benefits under the CI insurance become due. As many patients die within a few days after the first symptoms show, as is the case with myocardial infarction and stroke, the premiums required strongly depend on the survival period selected. Furthermore, a survival period enables a sound claims review which is sometimes impossible after the death of the insured. In this instance, an autopsy may be required and this could upset relatives. 30 days is an appropriate and quite common minimum period, both from an actuarial and marketing viewpoint. The survival period underlines the survival character of the CI cover as a living benefit. If, on the other hand, benefits are to be paid for medical expenses (surgery, chemotherapy, etc.), a survival period can hardly be stipulated, as insureds have to bear these costs themselves at any rate even if they do not survive the survival period. Here, a major medical expense (MME) cover would be more suitable. It would then be combined with a CI insurance. Insureds can have the direct medical expenses covered by the MME insurance and have the CI benefit to pay for their other financial burdens. 16

18 Assessment period In practice, benefits are not paid until the claim has been properly reviewed. For example, a neurological deficit of at least three months must be proved for a stroke, according to the definition. Such a claim may thus be settled only three months after the event. If, however, a permanent neurological disorder is proved before the end of the three-month period, the insurer can pay the benefit earlier if the survival period is over. The assessment period is fixed separately for each illness, as laid down in the definitions of the CIs. Exclusions The following exclusions are customary for CI covers: No amount shall be payable under this benefit if the relevant CI condition was caused directly or indirectly by attempted suicide or intentional self-inflicted injury by the life insured; addiction to alcohol or drugs; disease in the presence of an HIV infection. If several CIs of an accidental character, e.g. loss of limbs, blindness, etc. or total permanent disability (TPD), are included, it is advisable to extend the list of exclusions to: aviation, hazardous sports and pastimes, war and civil commotion. 17

19 3 PRICING DERIVING INCIDENCE RATES For quite some time, there have been claims analyses of CI portfolios (see Part II). However, the base data are not so comprehensive that incidence rates for insured lives could be obtained. An initial indication of the different CI risk of insureds on the one hand and the overall population on the other can currently only be derived, if at all, by drawing a comparison between the claims cases observed and the claims figures expected on the basis of population statistics. As long as CI incidence rates cannot be deduced from the claims experience directly, they will still essentially be determined in accordance with the system described below. Incidence rates are calculated in several steps which basically have to be taken separately for each illness to be covered. Population rates Population statistics on the incidence of each CI are taken as a basis. These statistics should be broken down by sex and age or at least by age group. The CI definition underlying the statistics should of course conform to that of the policy. First-ever adjustment Many people have two or more myocardial infarctions in the course of their lives. CI insurances, however, only cover the first infarction after commencement of the policy and cease after that event. On the other hand, people who have already had an infarction prior to insurance inception should be prevented from taking out a CI policy on the basis of the medical risk assessment. This means that the actuarial CI calculation only has to consider the actual first ( first ever in a lifetime ) infarction of a person the same applies of course to other CIs. Overlap of conditions Often one and the same health impairment causes the occurrence of several CIs one after the other. As the CI cover usually ceases after the first claim, such overlap effects must be considered in the calculation of actuarial bases. 18

20 Again an example to clarify the situation: about every second patient undergoing a bypass operation has had a myocardial infarction before. The incidence rate of a bypass operation can therefore be reduced accordingly since, at least in standard products, benefits are paid only once. Adjustment for insured portfolio As far as insured lives are concerned, it is still very difficult in the case of CI covers to estimate the extent of the effects of: Medical selection Substandard risks are filtered out at the underwriting stage and further insureds have a lower risk because of a better standard of living; these effects are similar to those known from life covers but perhaps to a different extent. Antiselection CI covers are more likely to be taken out by people who have particular reasons for suspecting that they will suffer from one of the diseases covered; the extent of this effect will vary according to the type of CI cover chosen. Moral hazard The existence of insurance protection will probably increase the claims frequency, which could especially be true for the cover of coronary artery surgery. Mortality during the survival period In pricing stand-alone benefits, the probability of dying during the survival period has to be subtracted from the incidence rates for the disease, because the CI benefit is to be paid out only to those who are still alive after that period. Mortality after critical illness In pricing acceleration benefits, the probability of the insured dying following a CI is used to calculate the overlap of CI and death. By considering this overlap, the incidence rates for the underlying life insurance could be reduced, as for all insureds who have received a CI benefit, no death benefit of that amount becomes due in the event of death at a later date. Instead of changing the actuarial bases of the main insurance, however, the overlap is usually considered by granting a discount on the CI incidence rates. The following graph is intended to further illustrate the situation. I H x Healthy lives I S x CI sufferers d H x d x Dead d S x 19