CRITICAL ILLNESS INSURANCE

CRITICAL ILLNESS INSURANCE M Münchener Rück Munich Re Group

CONTENTS

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 40 10 Australia 42 11 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

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

PART I THE PRODUCT

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

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

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 2. 1.4 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

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

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. 1.10 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

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

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

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

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

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 1. 2.3 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

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

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

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

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

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

The overlap corresponds exactly to the number d S x of deaths among CI sufferers. However, there are hardly any reliable statistics on the mortality of CI sufferers. This is why in South Africa an approximation model was developed with the help of which the cost of an acceleration benefit can be calculated. On the basis of this model, the incidence rate for an acceleration product is approximately Extra rate of CI ACC over the mortality = i x k x q x i x being the CI incidence rate without survival period (i.e. all deaths due to a CI must be considered) and k x being the portion of deaths caused by a CI. These k x portions can be deduced from cause-of-death statistics. Smokers/non-smokers The incidence of several CIs is strongly related to the smoking habits of the insured. For example, about 90% of all lung cancers are related to smoking, but also the risk of heart attack or stroke is about twice as high for smokers as for non-smokers. These ratios are different for males and females and dependent on age. Many markets have therefore established different rate tables for smokers and nonsmokers, implying the need to estimate the effect of smoking on the incidence rates. These considerations will of course be equally relevant for insurers providing CI cover on the basis of aggregate premium rates. The aggregate rates depend on the number of smokers in the insured group. But antiselection could lead to higher than expected smoker/non-smoker ratios in portfolios. Trend The population statistics used will be based on historical data. However, in order for them to be utilized for current actuarial bases, they must be investigated for any improvement or deterioration. For example, a trend in disease frequencies made visible with the help of a time-series analysis must be incorporated. In view of the above items, it becomes clear that careful deriving of actuarial bases represents a task that should not be underestimated. In this context, it will be a problem to find adequate statistical material for actuarially using these items. Sometimes estimates or assumptions will have to suffice. Appendix 2 illustrates the above steps, taking cancer incidence rates for a stand-alone rider in the UK as an example. 20

APPLICATION IN OTHER MARKETS Unfortunately, not all the markets have as comprehensive data as described above. Insurers are therefore often forced to transfer the results from one market the UK in our example to another. In doing so, it is necessary to consider the differences between one country and the other, if there are adequate reasons to do so, by making appropriate adjustments. For better accuracy of the actuarial bases, local statistical data should of course be procured and used wherever possible. If no reliable national statistics are available, actuarial bases from other markets may be transferred by comparing causes of death. This, however, should be done only where there are no other possibilities. In particular, where standards of medical care are a key factor in the survival rates following a CI event, differing standards of medical care between territories will have a major effect on mortality rates following such an event. Using cause-of-death statistics in this situation can result in incidence rates that are significantly different from the true underlying rates. DIFFERENT RATES FOR MALES/FEMALES As the incidence rates considered in Appendix 3 and the premiums listed in Appendix 4 indicate, both the level and the age structure of the incidence of critical illness experience for females are quite different from those for males. There are a number of factors affecting the incidence such as the high frequency of breast cancers, which increases the cost of providing CI insurance to younger females and the greater impact of cardiovascular problems on the health of middle-aged and older males. Different premium tables should therefore be developed for males and females. DIFFERENT RATES FOR SMOKERS/NON-SMOKERS As already mentioned, smoking habits definitely have a strong effect on the incidence rates of many covered CIs such as cancer, myocardial infarction or bypass operations. Therefore, the proposal form must ask about the type and degree of smoking (see Appendix 6) in order to filter out heavy smokers and charge an adequate smoker loading on the basis of the medical underwriting. Non-disclosure of smoker status seems to be a common problem. The statistics suggest that the proportion of smoker policies is much lower than in the overall population. If non-disclosure is detected, many life insurers only scale down the benefit level according to the respective smoker premium rate. Such a procedure gives a clear incentive to nondisclosure of smoker status. SUBSTANDARD RISKS Loadings are required if applicants are classified as substandard CI risks due to poor health conditions, hazardous professions or other relevant factors. In this context, it may well be commensurate with a risk to fix loadings that are different from those for the death or disability risk. In the event of especially serious impairments, a CI cover cannot be granted. Further details of underwriting are described in Chapter 4 of this brochure. 21

RESERVES For CI policies running for longer than one year, reserves for future claims payments must be set up. As a rule, such reserves are calculated for each policy in accordance with formulae corresponding to those for the mortality reserves. In addition to such individual actuarial reserves, further reserves are recommended to cover claims fluctuations and any deterioration tendencies of the CI risk. If business with long-term premium guarantees is concerned, even more emphasis must of course be put on the long-term performance of contracts. Careful observation of actual claims paid and subsequent adjustments of the reserves are indispensable. PREMIUM GUARANTEES The future claims experience may change with new diagnostic procedures and improved surgical methods. For example, obligatory cancer examinations for females could increase the CI claims frequency owing to earlier detection, whereas the total mortality might decrease. Likewise, changes in lifestyle could have a significant influence. Future CI claims experience is therefore subject to a high degree of uncertainty. Medical progress, changes in conditions and habits of living will continue to make the CI risk change constantly. Therefore, it is recommended not to guarantee premium rates on a long-term basis. If experience shows that the pricing bases are inadequate for a particular market, it will certainly be helpful to be able to adjust the premium rates, even for business in force. For the same reason, cover of the CI risk should be granted very restrictively in return for a single premium, as in such cases adjustments on the premium or benefit side cannot be implemented. The question of premium guarantees must also be seen in the context of the safety loadings in the actuarial bases. For long-term guarantees, substantially higher safety loadings are required than for short-term covers such as yearly renewable term insurances. 22

4 MEDICAL UNDER- WRITING OF CI COVERS 4.1 INTRODUCTORY REMARKS With the critical illness product new ground has been broken in medical underwriting. Experience with life and disability insurance is only of limited use, since when assessing these risks a critical illness is regarded only as one possible event that may lead to death or disability. Health insurers sometimes do cover selected diseases but may have acquired different experience in comparison to life insurers covering critical illness. There are apparently a number of special risk factors which can increase the incidence of a critical illness. These risk factors are primarily related to the circulatory, cardio- and cerebrovascular systems. Smoking as a risk factor not only inflicts damage upon these systems, but is also known to induce several types of cancer. Thus, insurers must have the chance to examine these special risk factors in the underwriting process in addition to reviewing the applicant s family and individual medical history, and they must have an underwriting concept for weighting these disease-causing parameters. The knowledge which medical doctors of insurance companies have gathered on rating substandard risks in life insurance in the course of many decades has led them to the conclusion that critical illness covers can be offered to applicants with low to medium extra mortality if the life rating is not a result of the basic diseases to be covered under critical illness. The Framingham Heart Study shows that the probability of risk factors developing into the actual disease is limited, which means that, despite the existence of such factors among a number of applicants, critical illness cover can still be offered subject to adequate risk compensation in the form of an extra premium. Establishing the life insurance rating is the first step in drafting Munich Re s underwriting concept for critical illness. Next, this concept provides a graduated system for evaluating special risk factors for critical illness. 23

4.2 GUIDELINES Initially, the total mortality of a risk is determined on the basis of the Life Underwriting Manual. Only standard risks and substandard risks with up to a medium rating are considered for critical illness underwriting. Risks with a high extra mortality and those to be declined for life insurance coverage are not regarded as acceptable for critical illness. In a second step, the risks to be considered are analysed and evaluated with regard to their specific critical illness risk. The risk factors of significance here are: Major risk factors Diabetes mellitus Hypertension Hypercholesterolemia Smoking Metabolic syndrome Unfavourable features in family history Minor risk factors Overweight Hypertriglyceridemia with low HDL Elevation of lipoprotein (a) Hyperuricemia Hyperfibrinogenemia Alcohol abuse Lack of exercise Health-impairing occupation Every risk factor is assigned additional percentage debit points on the basis of its severity. If applicants total percentage debit points exceed a given limit, they will be declined for critical illness cover. 4.3 IMPAIRMENTS TO BE DECLINED In addition to the major and minor risk factors outlined, there are special clinical pictures which more frequently lead to critical illness, and applicants who suffer from these impairments are not considered for critical illness cover: Coronary artery disease Diabetes mellitus type I Arteriosclerosis Peripheral vascular disease 24

These diseases can lead to heart attack (myocardial infarction), coronary artery (bypass) surgery, stroke or kidney failure (renal failure): Chronic severe diseases of the hematological system Chronic severe diseases of the liver and the gastrointestinal tract Chronic severe diseases of the respiratory tract Chronic severe diseases of the kidneys and the urinary tract Chronic severe neurological and psychiatric diseases HIV infection Some of these diseases may include a certain tumour risk or develop towards the necessity of an organ transplantation. Of course, a medical history of a disease covered by the critical illness benefit would be a compelling reason to decline an application. 4.4 UNDERWRITING INFORMATION The market in each country must determine which examinations are required for which critical illness sums insured. In general, comprehensive application forms should be used. The life insurance company s usual application form may require some amendments to make sure that all information relevant to critical illness can be easily obtained from the form. Appendix 6 includes a list which will enable companies to review their present application form and to determine whether any questions for important critical illness factors are missing. It is obvious that a report from the applicant s medical attendant is a most valuable source of information in properly assessing the critical illness covered, especially in cases where the application form received does not fully satisfy the underwriter. For group critical illness covers a free cover limit may be considered only for larger groups. It should be fixed, however, at a lower level than in group life insurance and accompanied by a pre-existing conditions clause to provide for the exclusion of cover for critical illnesses suffered prior to the entry into the scheme. 25

5 CLAIMS CONSIDERATIONS Experience gained in the markets in which critical illness covers have been sold for some time has demonstrated that broad and unclear policy definitions, non-disclosure by applicants and lenient underwriting and claims handling on the part of the insurers have led to many problems. It is evident that all departments concerned (actuarial, underwriting, marketing, claims and legal) should be involved in the development and introduction of a critical illness cover in order to achieve the following: The critical illness definitions used are such that disputes about what is covered are kept to a minimum. The policy wordings clearly indicate how and when the claimant should inform the company. Normally, this would require that a claim be submitted in writing as soon as practicable, but in any case within three months of the occurrence of a critical illness. Following claim notification, the claimant should be required to provide full details of the circumstances and for this purpose, a claim form on the lines of the specimen in Appendix 7 should be used to enable the company to take the necessary steps to ensure that the claim can be settled quickly. It should be stipulated in the policy wording that the company, prior to any claim payment, has the right to ask for all evidence relevant to the claim situation as well as confirmation of the insured s health on the date of inception of the policy. In addition, the company should have the right to request the claimant to undergo an examination by any doctor chosen by the company. As non-disclosure has been and still is a cause for serious concerns in critical illness business, the claimant s own medical attendant may play an important role at the claim stage. A specimen of such a report is shown in Appendix 8. Bearing in mind the complex nature of the critical illnesses covered, it is strongly recommended that in the event of a claim the company insists on full clinical, radiological, histological and laboratory evidence: 26

a) Cancer As an example, in the case of a claim it would be necessary to have a copy of the histological report to ensure that the disease falls under the definition in the policy conditions. This report should ideally provide details about the tumour in accordance with the International TNM Classification of Tumours. b) Heart attack (myocardial infarction) In this case, for the purpose of claims assessment access to all current and recent ECGs, a hospital report (and/or a report from the doctor consulted) as well as laboratory values would be essential. Should the evidence submitted reveal that the medical authorities have been unable to establish the three criteria laid down in the policy conditions, the claim would not be admitted. c) Stroke Again clinical evidence must be available to ensure that, at the date of onset, there was neurological deficit lasting more than 24 hours and that, three months after the stroke, there are still neurological sequelae. d) Coronary artery (bypass) surgery As the definition requires that the need for such surgical intervention must be proven by a coronary angiography, a copy of the angiography report in addition to the operation report would be required to support a claim. e) Kidney failure (renal failure) In this case, it would be necessary to provide a medical report with laboratory data of renal function (e.g. creatinine, creatinine clearance, urinalysis) and a confirmation that regular dialysis (hemodialysis or peritoneal dialysis) is carried out. More detailed information on claims handling is provided in Munich Re s publication Claims Life and ancillary benefits. 27

6 REINSURANCE OF CI COVERS As described in Chapter 1, the risks of error and change are far greater in CI insurance than in traditional life insurance. Through quota share or surplus reinsurance, a reinsurer can assume a portion of these risks and therefore reduce the financial uncertainty faced by the direct writing company. Reinsurance can be carried out on the basis of original terms or risk premium. The following aspects should be considered for the reinsurance of CI insurance: Due to the many imponderables in the actuarial bases and the difficulties in reliably quantifying the moral hazard, the possibility of adjusting premiums should be provided for if the loss experience proves to be worse then predicted. Insurers and reinsurers should therefore avoid premium guarantees lasting more than five years. If the insurer increases premiums, the reinsurer should automatically participate proportionally in these increases. Reinsurance is often used by insurers to reduce their exposure to CI business where they may have little or no experience. For this reason, small life insurers in particular choose lower retention limits for their CI risks than for their pure life risk in order to protect their solvency position. If the CI insurance is a prepayment cover, the insurer and reinsurer should participate both in the life and CI risk in the same proportion, as otherwise a dubious claim could create a problem between the insurer and the reinsurer. For example, if a claimant dies shortly after a heart disease, it may not be clear whether the insured suffered from a CI condition valid under the policy stipulations. If insurer and reinsurer do not share both the life and CI risk in the same proportion, the parties have a financial incentive to make the claim either a death claim or a CI claim, since the amount of loss faced by each party will depend on the cause of the claim. The loss, whether as a result of death or CI, should affect the insurer and the reinsurer equally. This can easily be achieved with a quota share reinsurance agreement. For example, the insurer might reinsure 30% of its life and prepayment CI business. In case of a 28

reinsured policy with US$ 200,000 life sum insured and a CI acceleration benefit of 50%, the reinsurer would pay US$ 30,000 (30% of 50% of US$ 200,000) upon CI and another US$ 30,000 (30% of [US$ 200,000 US$ 100,000]) on subsequent death, or US$ 60,000 (30% of US$ 200,000) if death occurs first. This example can be illustrated as follows: Death claim with prior CI claim Death claim without prior CI claim 250,000 250,000 200,000 200,000 150,000 150,000 100,000 100,000 50,000 50,000 0 Total Insurer Reinsurer 0 Total Insurer Reinsurer Life CI prepayment Life If the reinsurance is carried out on a surplus basis, it is advisable to fix only a retention for the life risk. The CI risk should then be reinsured in the same proportion as the corresponding life risk. For example, the insurer might want to retain all life risks up to an amount of US$ 50,000. A policy with US$ 200,000 life sum insured and 50% prepayment in the case of CI would be reinsured as follows: The excess of US$ 150,000 over the life risk retention, i.e. 75% of the total sum, will be assumed by the reinsurer. The CI risk would be reinsured in the same proportion. In the case of a CI claim, the reinsurer pays US$ 75,000 (75% of 50% of US$ 200,000) and another US$ 75,000 (75% of [US$ 200,000 US$ 100,000]) on subsequent death, or US$ 150,000 (75% of US$ 200,000) if death occurs first. The illustration of this example is as follows: Death claim with prior CI claim Death claim without prior CI claim 250,000 250,000 200,000 200,000 150,000 150,000 100,000 100,000 50,000 50,000 0 Total Insurer Reinsurer 0 Total Insurer Reinsurer Life CI prepayment Life 29

PART II RECENT DEVELOPMENTS AND EXPERIENCE IN SELECTED MARKETS 30

The concept of critical illness insurance 7 SOUTH AFRICA Developments Since the introduction of the first CI cover in South Africa in 1983, the product has developed there very quickly. Owing to the unfavourable claims experience in the first few years, attention first focused on the development of stricter insurance conditions and better underwriting. For example, several definitions were reviewed, as they had not explicitly excluded unjustified claims for benefits. The definitions of the second generation were much stricter and more detailed, so that both agents and insureds understood the scope of cover much better. This led to the percentage of rejected claims for benefits being reduced considerably. At the same time, further illnesses were included in the list of diseases covered. In the first few years, only four or five critical illnesses were insured, but as early as in the late 1980s, more than 20 illnesses and operations were covered under CI. After great initial sales successes, the percentage of policies where CI is included is declining markedly in South Africa. Whereas in the late 1980s approx. 60% of all life insurances were combined with a CI rider, the percentage is now around 25%. The main reason for this is that in South Africa major medical expense policies (MME) are increasingly taken out as additional benefits to cover health costs. MME can close the gaps in the national healthcare system much better than CI insurance. An MME cover is less expensive and protects the insured against more events. Moreover, it can also be offered as a family cover. This trend, however, could be reversed if MME covers may only be sold within the framework of health insurance, a topic currently under discussion in South Africa. In that case life insurers might be forced to sell more CI covers as riders. Another problem in the first few years after the introduction of the CI cover in South Africa was the large number of claims filed very soon after the inception of policies. As the majority of these early claims were for cancer and multiple sclerosis, it is assumed that many insureds took out a policy after diagnosing the illness themselves. Underwriting was apparently unable to detect these previous illnesses and to reject the respective proposals. This is why some policy conditions included a so-called waiting period (moratorium clause) which excluded benefits in the first few months. The most common moratorium periods are three and six months and are sometimes only applied to special illnesses such as cancer and multiple sclerosis. 31

In order to narrow the gaps in cover after the occurrence of a CI, two options were introduced with very differing success. Under a reinstatement of CI cover, it is possible to maintain benefits under a stand-alone cover after the occurrence of a CI (see Chapter 2). This means that the CI policy only ends at death or policy expiry, but not owing to the occurrence of an illness and the associated payment of benefits. As continuation of the full CI cover would be too expensive due to the subsequently substantially higher risk, only a sectorial cover is offered that has no causal connection with the first CI. The reason for this is that, for example, after a heart attack a second attack or a bypass operation is very probable. However, the risk of cancer after a preceding heart attack is not significantly higher than for a healthy person, so that this section may continue to be offered. This cover, however, was felt to be too expensive, and it did not meet the needs of the insureds. It seems relatively clear that what a heart attack patient fears most is a second attack and not cancer. This also was the reason why this option was only moderately successful. Under a reinstatement of life cover option (also called buy-back option), the insured can reinstate the life cover used up by a CI acceleration benefit after an extended survival period (in general more than a year) fully or in steps over several years (see Chapter 2). As even today stand-alone covers are rarely sold in South Africa, this option gives the insured a chance of reviving the life cover and of building up the necessary death cover for dependants, even after the occurrence of a CI. Another advantage for the insured is that this product is much less expensive than a stand-alone cover thanks to the survival period between the occurrence of a CI and the earliest point in time the option can be exercised. Under a life plus stand-alone CI rider, the occurrence of a CI and the subsequent death of the insured may have two different outcomes: If the insured dies within the survival period (normally 30 days), only a death benefit is paid out and the policy will terminate. Should the insured live beyond the survival period, the CI rider benefit plus a death benefit will be paid out (if the death occurs within the coverage period). Thus, surviving an extra day can result in a significant increase in benefits paid. For this reason, a reinstatement option may come much closer to the insureds needs. Nowadays, this option is offered very successfully in South Africa under nearly all products. The most recent developments in South Africa still tend towards the inclusion of more and more illnesses. However, the public will only purchase products which cover illnesses that are of a particular concern to them. Scaled benefits (also called tiered or staggered benefits) are a very recent development. By extending the scope of cover to an increasing number of illnesses, more and more benefits may be payable on the occurrence of events that are not particularly serious. In order to reduce benefits that are not commensurate with the risk, insurers increasingly define benefits as a function of the seriousness of the illness. 32

Example of scaled benefits sectorial cover only for coronary heart diseases Heart attack 100% Heart valve replacement 50% Valvulotomy 10% Valvuloplasty 10% Coronary angioplasty 5% Coronary bypass surgery 60% Surgery to/of the aorta 50% This means that the insurance conditions include a list clearly showing the benefit in percent of the initial sum insured allocated to the illness/operation involved. The insured of course still has cover for the remainder of the sum insured for other CIs. This means, however, that the insurer never pays more than 100% of the benefit. According to the above list, only 5% of the benefit would be due for an angioplasty, so that a subsequent heart attack would trigger 95% of the initial sum. The subsequent premium which continues to be due by the insured after partial benefits have been paid is reduced in the same proportion as the sum insured. On the one hand, this partial benefit protects the insured from fully utilizing the cover for a minor operation. Otherwise, in the event of a subsequent more serious illness, the cover would already have been used up. On the other hand, this approach may substantially reduce both the insurer s costs and thus also the premiums. In particular, the steep increase in heart and related operations forces insurers to word their future products in such a manner that they dispense with such triggers altogether or reduce the effect as far as possible by reducing the benefits. Disadvantages result exclusively from the larger amount of administrative work due to the adjustment of the sum insured and the follow-up premium. However, this approach moves the CI cover more and more in the direction of a health cover, as the sums involved are fixed as a function of the seriousness of the illness and thus also of the expected cost of medical care. The discussion of whether CI covers may be sold as products of life or health insurance is therefore becoming increasingly topical. 33

Experience 1994 studies of the causes of critical illnesses in South Africa show that there have been marked changes since the first evaluations of 1984. 1984 1994 8% 9% 10% 12% 5% 37% 53% 29% 39% Cancer Heart attack Bypass Renal failure and stroke Cancer Heart attack Bypass Renal failure and stroke Others By means of stricter underwriting and improved definitions, the proportion of benefits paid for heart attacks was substantially reduced in the period from 1984 to 1994. It is also striking that the proportion of benefits for cancer in 1994 is excessive as compared to the population figures. Apparently, the influence of selection depends on the respective illness. In 1997, the Actuarial Society of South Africa conducted the first detailed study of CI claims (Continuous Statistical Investigations Committee: Dread Disease Investigation 1991 to 1994). Only three companies with a total of 880 claims in the period from 1991 to 1994 took part in the study. Due to the incomplete information available, it was impossible to analyse the claims by cause or smoker status. Claims experience 1991 to 1994: Males Females Age Claims Exposure Rate in Claims Exposure Rate in 20 24 19 95,829 0.20 9 72,715 0.12 25 29 50 164,957 0.30 28 108,497 0.26 30 34 92 162,655 0.57 37 94,591 0.39 35 39 151 126,536 1.19 51 69,596 0.73 40 44 207 85,964 2.41 57 42,993 1.33 45 49 168 48,989 3.43 39 22,963 1.70 50 54 129 21,761 5.93 19 9,264 2.05 55 59 54 6,119 8.82 9 2,450 3.67 34

Medical/non-medical: This study was unable to confirm the experience of the 1980s, i.e. that the policies with medical underwriting showed substantially better claims ratios than the non-medical policies. On the contrary, the non-medical policies were markedly better than the medical ones. Selection: As expected, the effect of initial selection is clearly visible. The claims ratio for males in the first policy year is about 70% of the claims ratio of policies older than one year. For females, the ratio is similar. Sum insured: There is a clear influence of the amount of sum insured on the claims ratio of both males and females. For sums insured below SAR 100,000, the claims ratio for males is around 85% (with females 93%) of the claims ratio under policies with sums insured exceeding SAR 100,000. 35

8 UNITED KINGDOM Developments CI policies have been sold in the United Kingdom since the mid-1980s. After initial difficulties, these products from South Africa became a great success and became the bestsold life covers in the 1990s. In 1999, more than 800,000 individual life CI policies were taken out, and the portfolio thus increased to some three million. Seen statistically, 10% of the working population had CI insurance in 1999. CI products are thus more successful than traditional income-protection products. In 1998, new CI insurances under individual life regular premium business amounted to 23.6%, 86% of these prepayment and 14% additional payment policies. Prepayment insurances are typically taken out together with endowment, term or whole life policies and usually grant a prepayment of 100% of the sum insured. Types of CI covers in the UK (1998 new business) 2% 12% 23% 63% Mortgage-related stand-alone Non-mortgage stand-alone Non-mortgage accelerated Mortgage-related accelerated The mortgage business proved to be a particular growth factor. In 1998, more than 40% of all mortgage-related policies were written with CI prepayment covers to secure loans, either as mortgage endowment or mortgage-reducing term insurances. All in all, twothirds of the 1998 CI business was written in connection with a mortgage. At the beginning, only six illnesses were covered in the UK: cancer, heart attack, stroke, coronary artery bypass graft, kidney failure and major organ transplant. In the meantime, 36

the number (now more than 30) of covered conditions has also been extended considerably in the UK. It should be noted, however, that this trend is slowly coming to an end. Today there are two product classes: the so-called basic covers for six to ten illnesses and the comprehensive/extended covers for up to 30 or even more illnesses. In addition, most CI covers include total and permanent disability (TPD) as a catch-all. In 1999, the Association of British Insurers (ABI) developed a Statement of Best Practice for CI Cover including Model definitions of the most important illnesses Model wordings for suitable exclusion clauses For TPD, there are no model definitions yet as the market participants have gone different ways in defining the insured event. However, it can be observed that the main development is towards basing the TPD definition on more objective criteria, using activities of daily living (ADLs) and functional ability tests. The increasing standardization of insurance conditions has led to more market transparency and has strengthened in particular the market of independent financial advisers (IFA). The introduction of options for the reinstatement of life or CI covers after a claim (see Chapter 2 or 7) is still in its initial stage in the UK and has not yet been very successful. Some companies have started to combine CI covers with income-protection products, which have been conceived for the mortgage market and include cover against unemployment. In the event of extensive illness or unemployment, the insurer pays the instalments of the loan. If the insured suffers from a CI, the insurer redeems the outstanding loan by means of a single payment. Premium guarantees have become more common recently. Usually, one would expect premium rates to increase if such a guarantee is granted. Surprisingly, in the last ten years the premium rates for CI products have decreased considerably. Currently, a Healthcare Study Group for Guarantees is investigating the effect of premium guarantees on reserve requirements and is trying to develop new standards for the rating of CI products. Experience In March 2000, the Critical Illness Healthcare Study Group published its report entitled A Critical Review. This report evaluates for the first time the CI business experience of the entire UK market. Data of 32 companies from 1991 to 1997 were investigated, i.e. approx. 60% of all CI claims in the UK in that period. This study correlates exactly 5,536 benefit payments to 3.5 million policy years. 37

For acceleration business, the following claims rates (per policy) result: Males Females Age band Claims Exposure Rate in Claims Exposure Rate in 30 156 434,294 0.36 149 440,291 0.34 31 40 546 768,303 0.71 442 622,999 0.71 41 50 814 429,929 1.89 506 300,371 1.68 51 60 659 129,564 5.09 226 74,145 3.05 61+ 105 8,748 12.00 19 3,502 5.43 Causes of CI: Whereas with males approx. 42% of benefits are paid for cancer and 30% for heart attack, the majority of benefits for females are paid for cancer (75%). Strokes and TPD claims are similarly frequent with males and females (TPD approx. 6% and stroke approx. 7 to 8%). Male Female 30% 8% 7% 2% 6% 1% 6% 6% 10% 7% 42% 75% Cancer Heart attack Stroke Bypass TPD Others Cancer Heart attack Stroke Bypass TPD Others Smokers/non-smokers: The ratio of experience rates of smokers to non-smokers is around 150% for males and 137% for females. However, this ratio heavily depends on age. Whereas the risk of smokers in the age band up to 30 years is only about 25% higher, the extra risk in the age band over 60 years is around 70%. According to a separate study for the period 1991 to 1995, the ratio for males was around 135% and for females approx. 120%. This indicates that the ratio of smoker to non-smoker morbidity will probably continue to deteriorate. Selection: Although in the UK only few policy conditions have so far included a waiting period, a marked selection effect can be seen in the first policy years. For example, the claims ratio of males in the first policy year is only 59% of that of policy year 3 and following. Due to a lack of experience with durations of more than two years, nothing can yet be said about the actual selection period with CI covers. 38

Stand-alone experience: The results of the stand-alone products do not greatly differ from those of acceleration business. Reasons may be that on the one hand stand-alone policies have not been offered in the UK for a long time and there are thus many more policies in the selection phase than is the case with acceleration business. On the other hand, the available exposure is substantially lower than with acceleration covers, so that the statistical evaluations are less reliable. The following table (per policy) illustrates this fact. Claims Exposure Acceleration 5,074 3,281,875 Stand-alone 462 359,108 39

9 CANADA Developments CI insurance, in its current form, is relatively new in Canada, having been first introduced in 1993. Canadian CI sales have developed slowly since introduction. However, the industry has picked up dramatically in the last couple of years. In addition, banks are starting to enter the market by offering creditor CI (e.g. mortgages, loans and credit cards). Banks are hopeful that creditor CI will follow the same pattern as most of their creditor business, i.e. become a major source of revenue and profit. Over 40% of all individual CI policies in force were purchased in 1999. This trend is expected to continue with more and more companies (insurers and banks) entering the market and with more and more people becoming aware of CI insurance. In addition, the group market, i.e. creditor, employers and affinity, is emerging and is viewed as a market with major potential. The importance of CI insurance in the Canadian market is growing rapidly. The main reasons are Canada s ageing population and rising healthcare costs. CI insurance was first introduced as a stand-alone plan. It did not take long until it was added as a rider to disability and/or life insurance. Currently, insurers are experimenting with a more integrated approach such as accelerating the death benefit of a life insurance policy upon diagnosis of a critical illness. Others are offering a limited amount of CI coverage on a guaranteed-issue basis. There are different forms of return-of-premium (ROP) benefits on CI policies that insurers use to distinguish themselves from competitors. Most CI polices in Canada have an ROP as a death benefit built into their policies or offered as a rider. Others offer an ROP as maturity benefit refunding the premiums upon maturity if there was no CI claim. Some companies have introduced an ROP on lapse, giving policyholders the choice of terminating their policies at a certain point (e.g. after ten years or at age 65) and receiving a refund of premiums. Although the policyholder receives a benefit for choosing this option, some view this feature as morally wrong because the insurer is in effect encouraging policyholders to have their covers lapse. The most significant trend could be creditor CI insurance (in particular CI insurance as mortgage protection). Creditor insurance was first introduced in 1997 and has experienced steep growth in Canada in the last couple of years. By the end of 2000, annualized 40

premium revenue of creditor CI insurance reached about Can$ 12m, which represents a 100% increase in total premium volume since 1997. Insurers continue to cover more and more illnesses in their products in order to compete effectively. When individual CI insurance was first introduced in the Canadian market, the policies covered around ten conditions. Today, most policies cover 15 to 20 critical illnesses. The group market however, has been exhibiting a different trend. Here, fewer qualifying conditions with fewer exclusions are seen to be advantageous. Typically in creditor CI insurance, the three major illnesses are covered only, i.e. cancer, heart attack and stroke. Limiting the covered conditions to the three common illnesses simplifies the communication material, allows for easier explanation and presentation, and requires less underwriting and fewer additional exclusions as compared to a product covering 10 to 20 illnesses. There are a number of aspects to bear in mind regarding CI insurance in Canada as compared to the other more mature markets (e.g. UK and South Africa). Firstly, in Canada the premium rates for individual CI products (i.e. not employers, association, group or creditor CI) are guaranteed for the life of the policy (i.e. non-cancellable). This is definitely advantageous for the policyholder. However, from a direct writer s or a reinsurer s perspective, it represents an additional risk requiring higher premiums. Secondly, similar to the early stages of CI insurance in the UK, the CI definitions in Canada have not yet been standardized. Naturally, the current CI definitions in an insurance contract have become a point of differentiation from one carrier to another. Market pressures have resulted in some companies increasing their benefits and softening their definitions. From a marketing standpoint, a CI policy with softer definitions creates an advantage at the point of sale. Unfortunately, at the time of a claim this could become a contentious issue and ultimately lead to policyholder dissatisfaction. The reason is that a softer definition usually brings about an element of subjectivity, which makes it difficult for the claims department to interpret the definition as intended. This contradicts the philosophy of CI insurance, which tries to be as objective as possible. Insurers are beginning to realize that CI insurance is a living benefit and policyholders put a great deal of importance on value-added services at the time of a claim. Therefore, some insurers are considering not only paying a lump-sum benefit, but also offering services at the time of a claim such as: independent physician/specialist evaluation; referral to the most appropriate specialist given the claimant s condition; coordination of treatment in the Canadian healthcare system; if the claimant chooses to be treated outside Canada, the insurer will help with travel arrangements, accommodation and payment guarantees. Typically, these services will be managed and administered by a third party specializing in the medical field. It is still too early to say whether potential CI insurance consumers value these services at the time of a claim. However, initial signs are encouraging. Experience To date, there is no recognized experience analysis for this product in Canada. 41

10 AUSTRALIA Developments In Australia, most life insurances are written on a yearly renewable term basis. This also applies to the so-called trauma cover, the common name of the CI cover in Australia. More than 95% of the CI policies are temporary insurances where the premium may be reviewed. The CI premium proportion has been rising constantly in the last few years and amounted to 14% of the overall life premium income in 1997. In the same year, the new business premium was already 15%, the majority being prepayment riders on term insurances. Stand-alone covers have meanwhile been introduced, but their sales success is relatively small. Insurers have succeeded in introducing a waiting period in the Australian market, but the desired aims have not been achieved (see Experience). Currently, an extension of the waiting period to four or five months, especially for cancer, is under discussion. Two companies have extended their terms and conditions and are now allowed to exclude certain illnesses altogether if adequate medical progress has been made, or to change their definitions. However, policyholders must be advised three months prior to the effectiveness of such a change. This applies exclusively to policies with a premium guarantee. All in all, the CI development in Australia is towards more and more illnesses being included. Under certain policies, up to 32 illnesses may now be insured. Even loss of independent existence and covers for children are being offered. Experience In its Report on the Mortality Investigation 1995 1997, the Institute of Actuaries of Australia has analysed the market experience with the CI cover (trauma cover). In this period, a total of 626 claims were accepted with an overall exposure (lives exposed to risk) of about 367,000. 42

Claims experience 1995 to 1997: Males Females Age band Claims Exposure Rate in Claims Exposure Rate in 17 24 4,247 0.00 1 4,783 0.21 25 34 29 58,739 0.49 37 59,541 0.62 35 44 108 93,729 1.15 92 73,045 1.26 45 54 137 45,150 3.03 83 23,227 3.57 55 64 33 3,646 9.05 5 1,226 4.08 Causes of claim: Cancer is by far the most important cause of claim in Australia (61% of all claims 46% for males and 84% for females). Heart attack and bypass surgery amount to significant percentages only with males (17% and 10%). The proportion of illnesses apart from the four standard ones (cancer, heart attack, bypass surgery and stroke) is relatively large (16% of all claims 20% for males and 10% for females). Male Female 46% 17% 1% 4% 1% 10% 7% 10% 20% 84% Cancer Heart attack Stroke Bypass Others Cancer Heart attack Stroke Bypass Others Smokers/non-smokers: Whereas many policies with durations of more than five years were calculated with aggregate premiums (around 25% of policies older than five years), nearly all the new products differentiate between smokers and non-smokers (only 0.3% are on an aggregate basis), the majority of policies in force being non-smoker ones (more than 85%). An investigation of the higher risk of smokers as compared to non-smokers has been conducted, but it is not very reliable, owing to the small number of claims and the low exposure of smoker products. Selection: In the first policy year, the claims ratio with males is better than in policy years 2 to 5. However, the risk covered in the first policy year is smaller in Australia, due to a waiting period of three months on average. For the second policy year, no selection effect is visible. This means that if the waiting period is considered in the analysis, no selection effect at all is noticeable. 43

With females, the claims ratio in the first and second policy years is even higher than in subsequent ones. The assumption that antiselection considerably affects the claims frequency is supported by this investigation. The market confirms that for breast cancer (females) and heart disease (males) in particular there are substantially more early claims than expected. Many of them are filed after four or five months, i.e. shortly after the end of the waiting period. Sum insured: An investigation of claims according to sums insured reveals far lower loss ratios. This suggests that there are far more claims under policies without medical underwriting than under those with medical underwriting. Unfortunately this item has not been analysed. 44

11 SOUTHEAST ASIA Developments Although Southeast Asia is not a single market, there are many common features of CI business in this region which merit closer inspection. The following observations stem mainly from Malaysia, Singapore, Hong Kong and Taiwan. The first CI covers were offered in the late 1980s and insurers soon noticed that CI was a useful addition to life insurance and had considerable market potential. By the mid-1990s, virtually all companies that offer CI covers today had already launched their first products on the market. Besides life insurers, a number of health insurers now also offer CI as a supplement to their products. Since 1996, over a million new policies have been sold in this region every year mostly in Malaysia, Singapore, Hong Kong and Taiwan. A major marketing aspect in this region is the number of diseases companies cover. In Hong Kong, Singapore and Malaysia policies usually cover between 30 and 36 diseases. In total, more than 50 different conditions are already offered as benefit triggers. An exception to this is Taiwan, where the supervisory authorities have so far only approved seven diseases. In addition to covering diseases that are especially prevalent in this region (encephalitis, meningitis), many policies also provide cover against loss of independent existence and terminal illness. Just like TPD in the UK, these two benefit triggers are designed to cover diseases not expressly listed in the policy conditions, and thus provide an ideal complement to the product. One special feature is the inclusion of TI in stand-alone products. In these cases, TI provides an additional benefit for many causes of death not covered under the other CIs. This contradicts the original concept of TI cover, which only makes advance payments for subsequent benefits. A considerable part of the premium therefore has to be calculated for this additional benefit (see Chapter 2). Increasingly, covers are being offered which provide only partial benefit of 10 20% for certain benefit triggers. This system is frequently used for minor surgery such as angioplasty (see Scaled benefits, Chapter 7 South Africa). Benefits for children and juveniles, 45

which are often included automatically in the policies, also only provide reduced cover. However, these benefits are granted separately and do not reduce the benefit of the parents under whose cover the children are insured. Another feature, especially in Hong Kong, are products for target groups. The most common of these covers are the so-called Lady Plans, which are specially designed for young women who are starting a family. They offer covers available only as a package (see below) and others with the option of individual components. They basically include a combination of the following insurance elements: Life cover Prepayment CIC Coverage of specific female illnesses Maternity benefits Complications during pregnancy Coverage for congenital abnormalities of the children Health insurance benefits Hospital benefits Although CI is only a part of this package, it is the inclusion of certain diseases (e.g. systemic lupus erythematosus) that makes the product particularly attractive for women. The proportion of prepayment covers in this region is well over 80%, although life and CI covers are often combined under one policy. CI is therefore not an optional rider and can be acquired only in combination with a main policy. The premiums for CI policies are predominantly guaranteed and cannot be adjusted during the policy term. This seems especially risky for policies with an age at maturity of over 80 years, as the derivation of incidence rates for such old ages is not very reliable. As nearly all policies are currently in the age range below 55 years, only time will tell whether the rates are set at an appropriate level or not. Experience The Life Insurance Association of the Republic of China conducted the Dread Disease Experience Study 1996. It exclusively considers the Taiwanese experience of 1996, the exposure being 2.4 million policy years and 2,108 claims paid. The sum insured at risk amounted to TW$ 1,240bn. The following overall claims rates (policies) were observed: Males Females Age band Claims Exposure Rate in Claims Exposure Rate in 20 24 42 156,811 0.27 48 203,994 0.24 25 29 82 234,588 0.35 82 239,071 0.34 30 34 95 228,045 0.42 162 208,924 0.78 35 39 146 184,567 0.79 219 168,310 1.30 40 44 215 127,903 1.68 274 120,126 2.28 45 49 160 67,257 2.38 220 71,032 3.10 50 54 99 23,907 4.14 100 29,404 3.40 55 59 44 8,349 5.27 53 11,764 4.51 60 64 8 1,531 5.23 12 2,085 5.76 46

Causes of CI: In contrast to all the other investigations mentioned, this study shows that cancer also predominates for males (77%) as in other Asian markets. Heart attack and renal failure, however, only play a small part (7% each). For females, this effect is even more pronounced: 89% of claims are for cancer. The second most frequent CI cause is renal failure (7%). Heart attacks account for only 4% of claims. Male Female 7% 4% 7% 1% 2% 7% 1% 5% 77% 89% Cancer Heart attack Stroke Renal failure Others Cancer Heart attack Stroke Renal failure Others Medical/non-medical: The experience over all ages is worse under policies with medical underwriting than without. However, the main reason for this is that the non-medical policies are two years younger on average. If the results of five-year age bands are compared, no clear statement is possible. Sum insured: If claims and policies are evaluated according to sums insured and not to policy years, the claims rate is 5 to 10% lower, the only exception being main policies for females with medical underwriting. For females, it is apparently impossible to assess policies with large sums insured carefully enough by means of medical underwriting. Main policies/riders: The number of rider contracts exposed to the CI risk is smaller than the total exposure of the main policies. Thus, a claims analysis of the rider contracts generates less reliable statistical results than an analysis of the large number of main policies. However, it can be observed, that the claims rate of riders is significantly lower than the claims rate for main policies. Males Females Claims Exposure (policies) Claims Exposure (policies) Main policy 736 935,563 949 203,994 Rider 185 292,806 238 304,644 The crude claims rate of riders is only 0.708, whereas the crude claims rate of main policies is 0.915. The lower claims rates of riders compared to those of main policies can even be demonstrated for most age bands. 47

Final remarks This publication clearly demonstrates the wide and varied nature of CI insurance. The design and launch of a CI product is complementary to the sale of life insurance products, and in fact, because of its flexibility, a CI cover may make a company s regular life insurance products more attractive. CI insurances grant survival benefits, involving rather complex definitions of what actually constitutes an insured event. This complexity not usually found in traditional life insurance gives rise to additional risks that need to be given careful consideration in CI insurance. As one of the world s leading reinsurers, Munich Re has a wide range of experience in this field and is thus able to offer its clients expert assistance in the following areas 1 PRODUCT DEVELOPMENT A CI product will only be successful if it meets the individual requirements of its target market and fits in with the business structure of the life insurers selling the product. Munich Re s experts are on hand to offer support with product design, selection and definition of diseases, insurance terms and conditions, actuarial bases, profitability analyses, development of next-generation products. 2 MARKETING CI products usually present a challenge to marketing departments. First and foremost, the majority of people do not like to think about the possibility of serious illnesses. Also, the concept of cover for a CI product may be more difficult to convey than for a conventional life insurance. Munich Re has therefore devoted an entire brochure to this subject area, entitled: The Marketing of Critical Illness. Munich Re s service covers areas such as product positioning, target group analysis, suitable sales channels, advertising material. 48

3 RISK ASSESSMENT Risk assessment for CI insurances is more technically demanding than with traditional life insurances. With CI, risk assessment is rather concerned with assessing the risk of morbidity than determining extramortality. Consequently, Munich Re has developed an underwriting manual, based on state-of-the-art medical knowledge, designed to help underwriters perform efficient risk assessment. In addition, Munich Re provides advice and assistance with application forms, setting medical examination limits, assessment of substandard risks, financial underwriting, and conducts seminars/workshops for medical underwriters. 4 CLAIMS SETTLEMENT This subject is covered separately within Munich Re s publication Claims Life and ancillary benefits. Munich Re s services include the design of questionnaires on claims handling and support in the settlement of difficult CI cases. Munich Re also offers its clients claims seminars and conducts claims audits. 5 PORTFOLIO ANALYSES Munich Re offers a portfolio-analysis service for its clients, although it should be added that a sufficiently large statistical basis is needed to achieve meaningful results. Munich Re regards an aggregate portfolio of 50,000 policy years as a minimum requirement for such a portfolio analysis. 6 REINSURANCE For good reasons life insurers tend to reinsure CI business to a larger extent than conventional life business. Munich Re recommends its clients quota share reinsurance, which should be accompanied by surplus reinsurance to cover higher-than-average sums insured. Munich Re would be pleased to provide its clients with its full range of services, including the supply of a reinsurance capacity, which is tailored to the clients individual requirements. 49

The concept of critical illness insurance References and sources The marketing of critical illness insurance, 2000, Munich Re, Munich Claims Life and ancillary benefits, 2000, Munich Re, Munich Dread Disease Underwriting Manual, 1994, Munich Re, Munich Dread Disease Cover An Actuarial Perspective, Dash & Grimshaw; Staple Inn Actuarial Society, 1990 Dread Disease Insurance, 1989, Munich Re, Munich Critical Illness Cover A Time For Review, Presented to the Staple Inn Actuarial Society by P. Mannion & M. Werth (Munich Re UK) Cancer Statistics Registrations, Office for National Statistics, England and Wales, Series MB1 No. 25 Continuous Mortality Investigation Reports No. 9, Institute of Actuaries and Faculty of Actuaries, UK 1988 Mortality Statistics: Cause, Office for National Statistics, England and Wales, Series DH2 No. 23 South Africa Dread Disease Investigation, Continuous Statistical Investigations Committee Actuarial Society of South Africa, 1997 A Critical Review, Report of the CI Healthcare Study Group; Staple Inn Actuarial Society, 2000 Statement of Best Practice for Critical Illness Cover, 1999, Association of British Insurers Report on the Mortality Investigation 1995 1997, The Institute of Actuaries of Australia, 1999 (Appendix A.10 - A.12) Dread Disease Experience Study 1996, The Life Insurance Association of the Republic of China 50

APPENDICES 51

APPENDIX 1 SPECIMEN DEFINITIONS OF THE ELEVEN MOST FREQUENTLY COVERED CIs Cancer A disease manifested by the presence of a malignant tumour characterized by the uncontrolled growth and spread of malignant cells, and the invasion of tissue. The term cancer also includes leukaemia and malignant disease of the lymphatic system such as Hodgkin s Disease. Any non-invasive cancer in-situ, Hodgkin s Disease stage I, prostate cancer stage A, all skin cancers except invasive malignant melanoma (starting with Clark Level III) and any malignant tumour in the presence of any Human Immunodeficiency Virus are excluded. Heart attack (myocardial infarction) 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. Stroke Any cerebrovascular incident producing neurological sequelae lasting more than 24 hours and including infarction of brain tissue, haemorrhage and embolization from an extracranial source. Evidence of neurological deficit for at least 3 months has to be produced. Coronary artery (bypass) surgery The actual undergoing of open chest surgery for the correction of two or more coronary arteries, which are narrowed or blocked, by coronary artery bypass graft (CABG). The surgery must have been proven to be necessary by means of coronary angiography. With regard to this cover, angioplasty and/or any other intra-arterial procedures are excluded. Kidney failure (end-stage renal disease) End-stage renal disease presented as chronic irreversible failure of both kidneys to function, as a result of which either regular renal dialysis (hemodialysis or peritoneal dialysis) is instituted or renal transplantation is carried out. Major organ transplantation The actual undergoing of a transplantation as the recipient of a heart, lung, liver, pancreas, kidney or bone marrow. Paralysis Total and irreversible loss of use of two or more limbs through paralysis due to accident or sickness. These conditions have to be medically documented for at least three months. 52

Blindness (loss of sight) Total, permanent and irreversible loss of all sight in both eyes. Multiple sclerosis Unequivocal diagnosis of multiple sclerosis by a consultant neurologist holding such an appointment at an approved hospital. The insured must exhibit neurological abnormalities that have existed for a continuous period of at least six months or must have had at least two clinically documented episodes. This must be evidenced by the typical symptoms of demyelination and impairment of motor and sensory functions. Heart valve replacement Surgical replacement of one or more heart valves with prosthetic valves. This includes the replacement of aortic, mitral, pulmonary or tricuspid valves with prosthetic valves due to stenosis or incompetence or a combination of these factors. Heart valve repair, valvulotomy and valvuloplasty are excluded. Surgery of aorta The actual undergoing of surgery for a disease of the aorta needing excision and surgical replacement of the diseased aorta with a graft. For the purpose of this definition aorta shall mean the thoracic and abdominal aorta but not its branches. Traumatic injury of the aorta is excluded. 53

APPENDIX 2 DERIVING INCIDENCE RATES The steps mentioned in Chapter 2 for deducing the incidence probabilities are described below in detail, taking the cancer incidence rates for a stand-alone rider in the UK as an example. Population rates The following source is a suitable database: Cancer statistics registrations (CSR), England and Wales, Office for National Statistics, Series MB1 No. 25 These rates consider age-dependent statistics up to 1992. More recent data are contained in the Monitor of the Office for National Statistics, enabling estimates of the incidences of the last few years. Rates per 100,000 population of newly diagnosed cases of cancer: England and Wales Male All malignant neoplasms (ICD 140 208) excluding ICD 173 (malignant skin cancer) Age 1990 1991 1992 1993 1994 1995 1996 1997 20 24 25.6 26.1 25.3 25 29 36.0 33.9 36.5 30 34 43.2 43.6 48.1 35 39 63.6 65.5 63.3 40 44 102.0 99.3 108.1 45 49 177.5 178.3 180.8 50 54 326.8 323.8 343.1 55 59 562.5 552.9 565.7 60 64 982.0 959.0 963.9 All ages 416.4 418.4 435.6 424.9* 418.8* 414.3* 406.7* 402.4* * Estimated England and Wales Female All malignant neoplasms (ICD 140 208) excluding ICD 173 (malignant skin cancer) Age 1990 1991 1992 1993 1994 1995 1996 1997 20 24 22.9 24.1 24.1 25 29 41.3 40.6 42.3 30 34 79.0 77.3 79.2 35 39 134.5 131.3 136.2 40 44 212.9 216.1 221.5 45 49 328.2 332.7 346.5 50 54 470.5 492.9 511.9 55 59 645.1 662.4 663.8 60 64 896.2 885.8 906.7 All ages 407.2 414.0 428.8 406.7* 405.9* 404.9* 402.6* 400.5* * Estimated 54

Incidence rates in accordance with the Munich Re specimen definition for cancer will then result directly. The data is available in five-year age bands, broken down by sex and type of cancer. CI actuarial bases can be deduced from the column All malignant neoplasms excluding 173 as cancer type 173 (according to ICD 9 Code) Other malignant neoplasm of skin is excluded under the cancer definition. First-ever adjustment The CSR data only include newly diagnosed cancers. This means that double counting is excluded. A first-ever adjustment is therefore unnecessary. Overlap of conditions The critical illness cancer overlaps other CIs only insignificantly. According to US studies, for example, 0 to 10% of all cases of kidney failure are preceded by cancer. As, however, cancer is the CI covered most often, these slight overlaps are usually considered when calculating the incidence rates of the other CIs. Adjustment for insured portfolio Statistics on the better risk of insureds for various illnesses as compared to the normal population are not yet generally available. An indication is given by A Critical Review, Report of the Critical Illness Healthcare Study Group, UK, 2000 dealing, in Section 7, with the differences in population numbers and incidences observed in CI portfolios. These results, however, should not be used unaltered, also because the portfolio used for the study is in the selection phase. This is why actuaries often rely on the evidenced mortality differences which may then be transferred to the CI incidence rates. In CMIR-9 Continuous Mortality Investigation Reports No. 9, Institute of Actuaries and Faculty of Actuaries, UK, 1988, deaths according to causes in private insurance are compared with the population study Mortality Statistics: Cause, England and Wales. Selection discounts can be deduced. However, it appears unjustified to decrease the population incidences strongly on account of the markedly higher antiselection under CI covers as compared to death covers. For females, a discount is hardly acceptable considering the higher antiselection risk of typical types of cancer (e.g. breast cancer). Mortality during the survival period Cancers are usually not so acute that patients die within a few days after the diagnosis. This is why the mortality during the survival period here can be neglected when deducing incidence rates. 55

Smokers/non-smokers Various sources mention the types of cancer influenced by smoking habits. In addition, they indicate the portion directly attributable to smoking. Thus, a cancer rate can be deduced that is caused by smoking only. It must be considered, however, that former smokers and passive smokers are also included in this rate. The clear differences in the risk run by smokers and non-smokers will be shown on the basis of specimen incidence rates at the end of this section. Trend The CSR data shows a decreasing trend in the years from 1992 to 1997 (the 1992 rates are about 8% higher than those for 1997). When deciding whether or not this trend should be included in the calculation, you should consider that several signs indicate that the cancer risk in England and Wales is somewhat higher in reality, owing to the fact that screening examinations are not common. For example, a comparison between the cancer rates in England/Wales and the USA shows that breast cancer rates in England are far below the US rates (England and Wales/USA = 1/1.24 in the age bracket 45 49). However, in the age bracket 55 59, where screening examinations are increasingly conducted in England, the difference is only 5%. The situation is even clearer with prostate cancer: In the USA, there are markedly more cases per 100,000 inhabitants than in England and Wales (England and Wales/USA = 1/5.80 in the age bracket 50 54). Mortality after CI If considerations are based on a prepayment product, one additionally needs the factors k x mentioned under Mortality after critical illness. A model database to deduce these values is provided in Mortality Statistics: Cause, England and Wales 1996, Office for National Statistics, Series DH2 No. 23 These statistics show mortality rates from England and Wales for various causes of death and age bands from which the following factors can be calculated for cancer: For all malignant neoplasms excluding ICD 173 Age 20 24 25 29 30 34 35 39 40 44 45 49 50 54 55 59 60 64 k x (males) 7.5% 9.3% 10.5% 16.2% 23.4% 29.2% 33.9% 37.0% 37.2% k y (females) 19.3% 20.2% 31.2% 43.6% 49.3% 54.8% 56.9% 52.9% 45.7% 56

Results Ignoring the adjustment for an insured portfolio (which may differ from one company to the other) and any additionally required safety loadings, the following incidence rates result (in of the CI sum insured): Stand-alone rider Non-smokers Smokers Age m f m f 20 24 0.25 0.23 0.27 0.26 25 29 0.35 0.41 0.40 0.47 30 34 0.45 0.76 0.55 0.87 35 39 0.57 1.31 0.80 1.52 40 44 0.90 2.10 1.55 2.53 45 49 1.42 3.26 2.82 4.04 50 54 2.59 4.75 5.59 6.17 55 59 4.21 6.05 9.38 8.31 60 64 7.11 7.98 16.14 12.16 Based on the ELT15 population figures for q x the following incidence rates result for prepayment in of the CI sum insured (as above, ignoring the adjustment for an insured portfolio and any additionally required safety loadings and ignoring the risk premium rates due for the death risk): Prepayment/acceleration rider Non-smokers Smokers Age m f m f 20 24 0.18 0.17 0.20 0.19 25 29 0.27 0.34 0.32 0.39 30 34 0.36 0.61 0.43 0.69 35 39 0.37 0.96 0.52 1.12 40 44 0.51 1.50 0.87 1.80 45 49 0.66 2.13 1.31 2.64 50 54 1.11 2.86 2.40 3.72 55 59 1.47 3.20 3.28 4.39 60 64 2.31 3.90 5.25 5.94 57

APPENDIX 3 SAMPLE CRUDE INCIDENCE RATES Incidence rates in for smokers/non-smokers portfolio, calculated for the health situation in UK, survival period one month. For a CI product covering the five core diseases: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure. Stand-alone rider Age Male Female 20 0.24 0.25 25 0.36 0.36 30 0.51 0.62 35 0.82 1.17 40 1.52 2.01 45 2.80 3.22 50 5.05 4.94 55 8.62 7.34 60 13.69 10.40 65 20.35 14.14 Acceleration rider Age Male Female 20 0.18 0.19 25 0.28 0.28 30 0.39 0.47 35 0.63 0.89 40 1.12 1.49 45 2.03 2.33 50 3.49 3.41 55 5.73 4.88 60 8.56 6.50 65 11.19 7.77 (Rates per 1,000) For a CI product covering the 11 diseases Munich Re s CI underwriting manual is based on: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure, major organ transplant, paralysis, blindness, heart valve replacement, surgery for a disease of the aorta, multiple sclerosis. Stand-alone rider Age Male Female 20 0.33 0.32 25 0.50 0.48 30 0.72 0.80 35 1.06 1.38 40 1.78 2.25 45 3.12 3.49 50 5.48 5.27 55 9.31 7.82 60 14.75 11.08 65 21.79 14.98 Acceleration rider Age Male Female 20 0.26 0.26 25 0.40 0.38 30 0.57 0.63 35 0.83 1.07 40 1.34 1.69 45 2.29 2.55 50 3.81 3.67 55 6.24 5.25 60 9.30 7.00 65 12.07 8.33 (Rates per 1,000) 58

APPENDIX 4 SAMPLE NET PREMIUM RATES STAND-ALONE RIDER Based on the incidence rates i x from Appendix 3 the net level premiums for a CI standalone rider are calculated by using the formula P x,n = 1000 n-1 with Naa x Na x+n j=0 with v = a Daa x+j i x+j v 1 1+i discounting factor 7 12 I x+1 aa = I aa x (1 q aa x i x ) D aa x = I aa x v x active lives discounted active lives N aa x = D aa x+j j sum of discounted active lives Stand-alone rider 5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure Males Duration Age 5 10 15 20 25 30 35 40 45 20 0.28 0.34 0.41 0.53 0.73 1.03 1.46 2.00 2.62 25 0.41 0.50 0.65 0.90 1.27 1.78 2.44 3.19 30 0.60 0.80 1.12 1.58 2.22 3.02 3.92 35 1.04 1.45 2.02 2.81 3.79 4.89 40 1.93 2.65 3.63 4.83 6.17 45 3.52 4.73 6.21 7.84 50 6.20 8.01 9.99 55 10.25 12.66 (Rates per 1,000) Stand-alone rider 5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure Females Duration Age 5 10 15 20 25 30 35 40 45 20 0.29 0.35 0.48 0.67 0.91 1.22 1.59 2.02 2.47 25 0.43 0.60 0.84 1.14 1.51 1.95 2.46 3.00 30 0.79 1.09 1.46 1.91 2.43 3.03 3.67 35 1.45 1.89 2.41 3.04 3.75 4.50 40 2.40 3.03 3.77 4.61 5.50 45 3.77 4.65 5.65 6.70 50 5.71 6.89 8.12 55 8.32 9.76 (Rates per 1,000) Premiums are calculated using an interest rate of 3% and the mortality AM/AF 80 ult. 59

SAMPLE NET PREMIUM RATES ACCELERATION RIDER TO TERM INSURANCE The net level premiums for a CI acceleration rider are calculated by using the formula P 1000 x,n = with Naa x Na x+n with n-1 a Daa j=0 x+j i x+j v 7 12 (1 j+1 V x,n ) jv x,n reserve of the basic policy effected with age x and duration n at the end of the j th policy year. Acceleration rider to term insurance 5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure Males Duration Age 5 10 15 20 25 30 35 40 45 20 0.21 0.26 0.32 0.41 0.55 0.76 1.03 1.37 1.69 25 0.31 0.38 0.49 0.67 0.93 1.26 1.67 2.06 30 0.46 0.61 0.84 1.15 1.56 2.05 2.52 35 0.78 1.07 1.47 1.97 2.57 3.14 40 1.42 1.91 2.53 3.26 3.95 45 2.48 3.26 4.15 4.98 50 4.21 5.29 6.28 55 6.67 7.81 (Rates per 1,000) Acceleration rider to term insurance 5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure Females Duration Age 5 10 15 20 25 30 35 40 45 20 0.22 0.27 0.37 0.51 0.69 0.90 1.14 1.41 1.65 25 0.33 0.46 0.64 0.86 1.11 1.40 1.71 2.00 30 0.61 0.83 1.10 1.40 1.74 2.10 2.44 35 1.09 1.40 1.76 2.15 2.58 2.97 40 1.78 2.18 2.65 3.15 3.60 45 2.66 3.21 3.80 4.33 50 3.88 4.57 5.16 55 5.42 6.05 (Rates per 1,000) 60

SAMPLE NET PREMIUM RATES ACCELERATION RIDER TO ENDOWMENT INSURANCE Acceleration rider to endowment 5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure Males Duration Age 5 10 15 20 25 30 35 40 45 20 0.08 0.11 0.14 0.17 0.22 0.29 0.39 0.52 0.68 25 0.12 0.17 0.21 0.27 0.36 0.48 0.64 0.84 30 0.18 0.25 0.34 0.45 0.61 0.81 1.06 35 0.29 0.43 0.59 0.79 1.05 1.36 40 0.54 0.78 1.05 1.39 1.78 45 0.95 1.37 1.81 2.31 50 1.64 2.32 2.97 55 2.67 3.65 (Rates per 1,000) Acceleration rider to endowment 5 covered CIs: Cancer, myocardial infarction, stroke, coronary artery surgery, renal failure Females Duration Age 5 10 15 20 25 30 35 40 45 20 0.09 0.12 0.15 0.20 0.27 0.35 0.46 0.58 0.73 25 0.13 0.18 0.25 0.34 0.45 0.58 0.73 0.90 30 0.23 0.34 0.45 0.59 0.75 0.93 1.14 35 0.42 0.59 0.76 0.96 1.18 1.43 40 0.69 0.95 1.19 1.46 1.76 45 1.05 1.42 1.77 2.13 50 1.54 2.07 2.52 55 2.20 2.87 (Rates per 1,000) Premiums are calculated using an interest rate of 3% and the mortality AM/AF 80 ult. 61

APPENDIX 5 CRITICAL ILLNESS BENEFIT SPECIMEN POLICY CONDITIONS 1 Event on which the benefit becomes payable This benefit shall, subject to the special conditions below, become payable if it has been diagnosed that during the period of cover of this benefit, the life insured has suffered from or developed one of the critical illness conditions defined in Clause 2 below. 2 Definitions Period of cover of this benefit shall mean the period as from the commencement date of this benefit until the expiry date specified in Clause 4 below. Critical illness condition shall mean the life insured having suffered from or developed one of the following critical illnesses during the period of cover of this benefit here the covered CIs should be listed Critical illness definitions here the full definitions of the covered CIs should be listed 3 Amount of benefit payable In the case of prepayment products a) Lump-sum payment of the sum insured under this benefit, premium payment for this benefit will cease. b) The life sum insured under the policy, payable in case of death (or maturity), shall be reduced by the critical illness benefit paid out. The premium payable for the policy shall be reduced in the same proportion. 4 Alternatively In the case of stand-alone products a) Lump-sum payment of the sum insured under this benefit as soon as the insured has survived for here the survival period should be stated after a diagnosis of the critical illness conditions defined under Clause 2 above. Premium payment for this benefit shall cease. (If the CI cover is a rider attached to a main policy:) The premium payable for the main policy shall continue unchanged after the CI payment. b ) No benefit shall be paid if the insured dies within here the survival period should be stated after occurrence of the CI. 4 Expiry of this benefit This benefit shall expire at the earliest upon a) lapse, surrender of the policy, conversion of the policy into a paid-up insurance; or b) the benefit expiry date shown in the schedule; or c) the date of the first occurrence of the event on which this benefit becomes payable. 62

5 Notice of claim Written advice of any claim under this benefit must be given to the company at its Head Office as soon as practicable after the insured suffers from or develops a critical illness condition and, in any event, within three months of any such occurrence. 6 Proofs No amount of benefit payable under this benefit shall become payable until the insured has provided proof to the satisfaction of the company of a) the age of the life insured; and b) the occurrence of the relevant critical illness condition, proof of which shall include a diagnosis confirmed by a registered medical practitioner appointed by the company and supported by acceptable clinical, radiological, histological and laboratory evidence. Prior to any payment under this benefit being made, proof of the right of the insured to the proceeds of this benefit shall be given to the company. 7 Exclusions No amount shall be payable under this benefit if the relevant critical illness condition was caused directly or indirectly by a) attempted suicide or intentional self-inflicted injury by the life insured, b) addiction to alcohol or drugs, c) diseases in the presence of an HIV infection. No amount shall be payable under this benefit in respect of a critical illness condition diagnosed within a period of here the waiting period should be stated after the commencement date of the policy. 8 Premium The Company reserves the right to adjust the premium payable for this benefit as from the next anniversary date of the policy by giving three months advance notice in writing. 63

APPENDIX 6 CHECKLIST FOR THE APPLICATION FORM Please check whether you are able to obtain answers to the following questions from your present application form. General questions with regard to the CI cover Clear product details, i. e. what type of critical illness cover has been requested. Occupation (incl. duties/activities)? Name and address of the applicant s medical consultant? Question about previous cover? The applicant should be asked to comment on any previous critical illness as well as sickness cover or any simultaneous applications. Are the covered conditions clearly named in the application form? For instance, have you ever had a myocardial infarction? Family history of the applicant Has anybody in the applicant s family (mother, father, siblings) ever suffered from heart or cardiovascular disease, stroke, cancer, diabetes mellitus, kidney disease, mental illness, alcoholism, Huntington s chorea, multiple sclerosis, motor neurone disease, Alzheimer s disease, hypertension, hyperlipidemia, epilepsy or any other hereditary disease? If yes, try to obtain age at onset, condition and, if applicable, age at death. Lifestyle of the applicant Smoking: If yes, do you ask about the number of cigarettes a day/since when? Alcohol: If yes, do you ask about the daily alcohol intake/since when? Drugs: If yes, do you ask about the type of drug/since when? Dangerous leisure activities (e.g. aviation or motor racing)? Medical history of the applicant Height/weight Blood pressure Indication of previous or future hospitalization/operations, indications of special examinations or medical treatment at present or in the past? Were there any pathological results (e.g. blood tests, ECG s, X-rays, endoscopy, etc.)? Has the applicant ever been diagnosed positive for HIV infection or ever suffered a sexually transmitted disease? Has the applicant ever received treatment with blood products or undergone a blood transfusion? Does or did the applicant ever suffer from heart or cardiovascular disease, stroke, cancer, diabetes mellitus, hypertension, hyperlipidemia, kidney disease, mental illness, alcoholism, Huntington s chorea, multiple sclerosis, motor neurone disease, Alzheimer s disease, epilepsy or any other hereditary disease? Did he/she ever have to undergo an organ transplantation? Does or did he/she ever suffer from disorders of the eyes or ears? 64

APPENDIX 7 SPECIMEN CLAIMANT S STATEMENT Name Policy number Address Home telephone number Business telephone number Occupation at the onset of your illness Please describe the regular duties/activities of your job Please give full details of the extent and nature of your current illness Date on which you first consulted a doctor for this illness Have you previously suffered from or received treatment for a related illness? Yes No If yes, give complete details Please give details of the treatment you have received including details and dates of any hospital examinations or in-patient treatment Have any of your blood relatives suffered from a similar or related illness? 65

If yes, state degree of relationship, nature of illness and the date when such illness was initially diagnosed Do you smoke cigarettes? Yes No If yes, what is your daily consumption and how long have you been smoking? If no, have you ever smoked? Yes No If yes, what was your daily consumption and when did you quit smoking? Please give names, addresses and telephone numbers of all physicians who have treated you, and of all hospitals at which you have been treated for this illness (include dates attended): Name/s Address/es Telephone number/s Please give the name, address and phone number of your family physician Name/s Address/es Telephone number/s I declare that the information provided on this claim form is true and complete to the best of my knowledge. Date Signature of life insured If life insured is unable to sign: Print name of individual completing this form Signature of individual completing this form 66

APPENDIX 8 SPECIMEN PHYSICIAN S STATEMENT CORONARY ARTERY BYPASS GRAFTING Confidential medical certificate Full name Date of birth Policy number The above-named is insured with (name of company) against the occurrence of certain contingent events associated with his/her health. A claim has been submitted in connection with one of the above conditions and, to enable us to assess the claim, we would be grateful for your cooperation in the completion of this form. 1 Please indicate your diagnosis for this patient: 2 Are you the patient s usual medical attendant? Yes No If yes, please provide copies of your office records, examinations performed (including ECG tracings, exercise stress tests, enzyme assays, isotope imaging, coronary and LV angiography), consultation reports and hospitalization summaries for the past two years. If no, please provide the name and the address of this patient s usual medical attendant: 3 Is there any record of related illnesses in the patient s family history, or any other related family history? 4 Please give details of anything in the patient s habits, personal medical history or family history which would have increased the risk or contributed to his/her condition: 5 Please give details of the patient s habits in relation to cigarette smoking, including, to your knowledge, how many cigarettes the patient has smoked in the past and currently smokes: 67

6 Please give the name and address of all consultants, specialists or hospitals to which your patient has been referred or attended for this condition: 7 If there is any further information that, in your opinion, will assist our Chief Medical Officer in assessing this claim, please give details: Date Signature Doctor s stamp Name (printed) Address 68

APPENDIX 9 ACTUAL FRAUD CASE This section describes a case of fraud which took place in South Africa and is intended to serve as an extreme example of what can happen with contracts offering living benefits. It is clear that such a problem is not restricted to CI, and similar cases may also occur in disability-related (and to a greater extent medical) contracts. The people involved in this case were an independent insurance broker, two doctors, and various spouses and other close family members. All the syndicate members knew one another well and had all, either at the time of the fraud or in the past, experienced a variety of problems involving alcohol, drugs and money, although this fact only came to light during the subsequent investigation. The original plan was to issue a number of relatively small CI policies to the various members of the syndicate on the basis of fraudulent medical evidence, either in the form of questionnaires completed by the applicant or examinations carried out by one of the syndicate doctors. The policies would then lead to early claims for illnesses related to the poor health of the members which was not disclosed at the application stage. This objective changed somewhere along the line and the syndicate made a conscious decision to create claims artificially and back these up with false evidence. The claims were created in various ways, including, for example, the use of inconclusive evidence of cancer. These included techniques such as needle aspiration which, when used to supply evidence for a claim, would result in claims that could be disputed but could not be disproved. With the onus of proof on the insurance industry, such claims are seldom contested. Similarly, one of the more direct ways in which claims were manufactured was where an uninvolved patient was operated on in hospital for a tumour, which was, as per normal practice, then sent for pathology testing to establish possible malignancy. It would appear, although this has not yet been proved beyond doubt due to the complicated nature of DNA testing, that not all the tumour was sent for testing. Some of it was retained by the doctor and, if it was found to be malignant, was subsequently sent to another laboratory, using one of the syndicate member s name as the patient. With such evidence to corroborate a claim, suspicion would never be raised and this was indeed true here as many claims were paid out to various people in the syndicate. As mentioned above, the policies predominantly involved small sums insured and were spread around numerous companies. This made it very difficult to detect or even establish a link. The fraud is believed to have been uncovered purely by chance during a telephone call between a claims underwriter and one of the claimants or even the broker himself. Although exact details of the discovery are unclear, it is safe to say that it was luck and not industry-wide policing of critical illness that resulted in detection of this scam. 69

Suspicion was raised during the conversation due to inconsistencies and ambiguities in the respondent s answers to questions posed by the insurer. Subsequent investigations throughout the industry unearthed a link between a large number of recent claims and a single intermediary. This then led to further industry-wide investigations and it was found that claims in excess of SAR 2m had been paid out or were being considered for payment to members of the syndicate. Furthermore, all policies had been sold by the same broker and all medicals had been performed by one of the two doctors in the syndicate. At the end of the day, the true reason for this fraud being unearthed was purely the age-old human problem of greed. Had they behaved more sensibly and cautiously, they could conceivably have got away with the fraud over many years and nobody would have been any the wiser. As is often the case in such scenarios, once the facts of the case were unearthed the syndicate collapsed, and many of the members are now clamouring to be the one to reveal all in return for immunity. But as is also true in many such situations, it remains to be seen whether this case will actually reach the courts. This case study was included to show that while living benefit policies have a profitable and necessary part to play in many markets, they clearly need to be managed beyond the usual policy, actuarial and underwriting levels associated with traditional covers. Effective management requires that all staff and agents, but in particular claims and underwriting personnel, display the necessary diligence and even an element of investigative methodology in their work. 70

2001 Münchener Rückversicherungs-Gesellschaft Central Division: Corporate Communications Königinstrasse 107 80802 München Germany Tel.: +49(0)89/3891-0 Fax: +49(0)89/399056 http://www.munichre.com Responsible for content: Operational Division: Life Dr. Ulrike Hartwagner Werner Hohenberger Dieter Kroll Karl-Heinz Schaller Order number 302-02916 Cover photo: Stone/Getty-Images