Critical Illness Insurance

Critical Illness Insurance From Risk Evaluation to Successful Product Design

PartnerRe

Š 2009 PartnerRe 90 Pitts Bay Road Pembroke HM 08, Bermuda Contributors Joanna Atkin, Life, PartnerRe Markus Lßtzelschwab, Life, PartnerRe Jane Roberts, Life, PartnerRe Editor Dr. Sara Thomas, Client & Corporate Communications, PartnerRe For more copies of this publication or for permission to reprint, please contact: Corporate Communications, Bermuda Phone +1 441 292 0888 Fax +1 441 292 7010 This publication is also available for download under www.partnerre.com The discussions and information set forth in this publication are not to be construed as legal advice or opinion.

February 2009, 1,000 en

Foreword

Critical Illness (CI) insurance pays a lump sum benefit on the occurrence of one of a list of pre-defined events or conditions, such as cancer or heart attack. The product originated in South Africa in the early 1980s and quickly moved to market prominence because it filled a very clear, useful and thus saleable gap in many markets. Despite its initial appeal and success, however, CI insurance subsequently experienced a number of issues. Initiatives to tackle these issues have however been taken, and at PartnerRe we believe that the market is now poised to reach its full potential.

This publication highlights important features and positive steps that can be taken to realize an effective CI insurance product. It details CI insurance – its design, cover and related underwriting and pricing considerations – and explains how risk uncertainty, competition and external economic factors have in the past negatively impacted sales. Frequent references are made to practices in the U.K., as other markets might be able to benefit from the experiences and progress made in this, the largest and most developed CI market.

PartnerRe has extensive experience in worldwide life markets and in building long-term relationships through knowledge sharing. With this approach, we have assisted our clients in developing traditional and alternative life products.

We hope that you will find the information shared in this publication interesting. To discuss the content further and to find out how we can help your business to develop a CI insurance product and/or to effectively support your critical illness risk portfolio, please contact the PartnerRe Life team (partnerre.com/reinsurance operations).

Franck Pinette Head of Life, PartnerRe

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Table of Contents

Product Design

5

Critical Illness Conditions

15

Pricing

19

Risk Considerations

29

Sales and Marketing

35

Underwriting

41

Claims

47

Rationale for Reinsurance

51

The Future of Critical Illness Insurance

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3

Product Design

Critical Illness (CI) insurance has been one of the most successful innovations in the life insurance protection market over the last 20 years. It has been successful principally because it is a simple and effective proposition: a lump sum payout upon receiving a life-changing medical diagnosis or the need to undergo a surgical procedure. The promise of a substantial lump sum payout at the point of need, combined with the freedom of the policyholder to use the money as they choose, is in many ways a more effective value proposition than a comprehensive Medical Expense or Income Protection (IP) Plan.

However, contrary to its simple concept, CI insurance is a complex product. Policy definitions must be described in precise medical terms and these can be difficult for both intermediaries and policyholders to evaluate. Additionally, risk carriers worry about the pace of medical advance and its impact on claims experience, especially when premiums are guaranteed.

With future generations of CI insurance there will be pressure to update the conditions and definitions to take into account medical and diagnostic advances.

In this first chapter we consider the key product design issues associated with CI insurance.

Structure The majority of CI products issued today are sold on an acceleration basis, which accelerates all or part of the proceeds of the death benefit.

Therefore, the sum assured is paid on the first of either death or critical illness to occur.

Another basis for this product is the stand-alone CI contract, where the sum assured is payable only in the event that the insured suffers from a critical illness. Although particularly straightforward from a conceptual and administrative viewpoint, it is this version of the CI concept that may present more difficulty to pricing actuaries and underwriters.

For example, a survival period is necessary to ensure sufficient proof that a critical illness has occurred prior to death. This point is discussed further below.

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CI conditions covered Early CI products were restricted to a small number of major critical illness conditions, such as heart disease, cancer, stroke, kidney failure and organ transplant. As CI insurance has developed, more conditions have been added, often driven by the “arms race” of companies competing to have the longest list of covered conditions. At times this has produced beneficial innovations. Quite often, however, “add-ons” have brought little value other than to confuse intermediaries and also the policyholder, who immediately wants to know why their insurance company does not cover the latest addition(s).

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A CI condition should ideally satisfy the following criteria for it to be appropriate: • Marketing: the condition should be serious and a financial need must arise on incidence, i.e. there must be an insurable interest. In addition, the extent of coverage offered should not be misleading to policyholders.

• Underwriting: there should be little potentia l for anti-selection (e.g. through non-disclosure) and little or no way in which the insured can influence the risk (e.g. through voluntarily undergoing non-essential surgery).

• Claims: there should be a clear definition of what constitutes a loss and an unequivocal means of medical diagnosis.

• Pricing: there should be sufficient data to enable confident pricing of the benefit.

In the Critical Illness Conditions chapter we present the wordings for and also comment on a number of CI conditions.

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Standardized definitions If one insurer’s definition of a critical illness covers a given claimant’s conditions, while another insurer’s definition does not, policyholders and the industry as a whole ultimately suffer. Consistency between insurers in this respect promotes a more equitable, transparent and sustainable market.

In 2007, the Association of British Insurers (ABI) in the U.K. agreed on model CI definitions for 23 conditions. Originally driven by sales considerations so that intermediaries and consumers could more easily compare products, this standardization within the market has also brought benefits by bringing together experts from various disciplines (e.g. medical doctors, underwriters, lawyers, actuaries, claim assessors) and by reducing individual company costs.

The other side of the standardization coin is that the practice can be viewed as anti-competitive and discouraging improvement and genuine innovation.

Consumer interests should be paramount and not subsidiary to those of other stakeholders; sustainable profitability cannot be derived from products that fail to meet consumer need. The standardization of CI definitions has successfully fostered a degree of comfort with the product among intermediaries and consumers. However, it should not override the development of true innovation in product design.

Severity-based definitions As the number of CI conditions has increased, the concept of payment based purely on diagnosis or on the need for surgical procedure has gradually eroded. Contracts are now dominated by definitions that refer to some element of the impact of a condition. For example, in the U.K. the ABI standard definitions exclude early-stage cancers that can now be easily treated, and state that a benign brain tumor must result in permanent neurological symptoms.

There are several reasons behind this move towards severity-based definitions: • For competitive reasons, many of the new conditions were added at no or minimal additional price, necessitating a severity-based definition to limit the claims.

• It was recognized that unforeseen changes in diagnostic procedures could leave companies vulnerable to an explosion of claims incidence if additional safeguards were not included.

For example, many conditions can be present for many years before they become symptomatic and for the same underlying disease some people may go on to develop the symptoms, while others may not. If the definition is based solely on diagnosis and a test is developed to identify the presence of asymptomatic (without symptoms) disease, claims incidence would increase and become less predictable.

• Public health screening programs identifying asymptomatic disease in large sections of the population compound the effect of the previous point.

• The intention of the cover is to pay for serious levels of a condition – as reflected in the various alternative names of the product, including “serious illness benefit”, “crisis cover” and “trauma benefit”. Advances in medical treatment have meant that many conditions are no longer as “critical” as they once were. There is a desire to maintain a link between the benefit and the real need for payment arising from the impact of a condition.

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Reviewability of definitions The reviewability of definitions allows for new conditions to be added to existing contracts and for conditions that are no longer considered “critical” to be removed, thus ensuring that cover remains appropriate to the actual risk to which the insured population is exposed. It also allows for updating of the wording for individual definitions, essential for claims assessment as evidence availability moves in line with medical advances.

In markets with standardized definitions, such as the U.K., definition changes may be implemented across the market based on a comprehensive review of the issues by technical and medical experts (information which cannot be as easily amassed by individual risk carriers).

The plus points of retrospective changes to existing policies are as follows: • They provide good public relations opportunities as the scope of cover can be expanded for the same price.

• Claims assessment is simplified.

• System constraints are kept to a minimum as all policies are dealt with on the same basis.

The negative aspects of retrospective changes are as follows: • Realistically, they can only be implemented if they are not detrimental to the policyholder for reasons of fairness – otherwise, rightly, criticism will be attracted from the media, consumer bodies and regulators.

• There may be a large administrative burden of informing existing policyholders.

• A deep understanding of exposure is required to model the effects of changes on claims experience.

• There may be other significant cost implications for the insurer and also the problem of how to treat policyholders whose conditions are now covered, but were not covered at the time of their claim.

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Reviewability of premiums Premium guarantees provide peace of mind for policyholders, but this comes at a price as guaranteed products are more expensive. If premiums are reviewed, this is typically done every five years and processes must be in place to inform policyholders and manage their expectations. The basis on which premiums will be reviewed must also be clearly set out.

Theoretically, premiums can rise or fall based on claims experience, but this is subject to a great deal of regulatory scrutiny and significant upward shifts have yet to be tested.

Total and Permanent Disability (TPD) One of the most commendable innovations in CI product design has been the advent of a “catch-all” clause, whereby the benefit payment is made in the event that the insured is totally and permanently disabled due to a condition which is otherwise not listed. Effectively, this extends the list of CI conditions considerably, since the insured could be afflicted with a very rare serious illness and still receive a benefit payment.

Any benefit based on the term “disability” should be considered carefully by insurance technicians; the first question that needs to be asked is how the disability is defined. There are three main styles of definition: those with an occupational basis, those focusing on named working activities or functional abilities, and those relating to named activities of daily living (ADLs).

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This benefit is fundamentally different in concept from the main benefit as it is not based on a specific listed CI condition but rather on the impact of an unspecified underlying condition. This clause prompted claims for any underlying condition as long as the claimant perceived that they were permanently unable to work or perform activities of daily living (depending on the definition).

A mismatch between the intention of the cover and the policyholder’s perception of it emerged, resulting in a high claim declinature rate and poor publicity. Also, from an insurer perspective, although the number of TPD claims is relatively small (U.K. experience), the time and level of expertise needed to underwrite the initial risks, adjudicate the claims and deal with disputes is a disproportionate drain on skilled risk management resources.

In the U.K., the industry is working together to try to resolve the perception gap surrounding TPD. The industry group will review the TPD definition and consider other initiatives with the final aim of improving consumer understanding and reducing TPD claim declinature rates. Many of the current CI definitions effectively include an element of TPD as part of the criteria, as they require a level of functional impairment that would be sufficient to prevent most people from working. In some cases, an occupation based TPD benefit would pay out earlier than these definitions and therefore insurers covering TPD as a separate condition need to be careful that they do not decline claims under the other definitions without first considering whether they qualify under TPD.

Terminal Illness (TI) Another “catch-all” benefit involves paying the CI sum assured in the event that the insured is medically certified (to the satisfaction of the insurer) to be terminally ill and with an expectation of life of less than an certain period (typically 12 months). The TI benefit is nowadays commonly attached to the death benefit element of a cover, rather than appearing as a named CI condition.

The inclusion of a TI benefit adds a lot of value to the cover as the sum assured is paid when it is most beneficial.

Tiered benefits The majority of CI policies are “all or nothing” products, which may leave some people unprotected despite a degree of impact from their condition and a perception that, based on its diagnostic label, their illness is sufficiently serious to have qualified for benefit payment. Conversely, the products may pay a full benefit to people who have suffered limited impact, such as a heart attack following which the individual is able to return to work within a few weeks.

It is in fact easier to design tiering for some definitions than for others. For example, international staging protocols for cancer provide an objective basis for the split of benefit levels.

Assessment of functional ability is more subjective and open to challenge.

The major disadvantage of this approach, however, is that the CI product begins to lose some of its much-vaunted simplicity; one of the reasons that intermediaries generally find it an easy benefit to sell is that it typically does not have a complicated payment structure. Clearly, some compromise between simplicity on the one hand, and a correlation between benefit size and condition severity on the other, is called for. A further disadvantage may be that the pricing assumptions become more complicated and possibly more difficult to support with complete statistics.

“Tiered” or “staged” CI benefits that pay a lower percentage of the benefit allow limited cover that would be excluded under traditional CI, increasing the perceived value to the consumer. These benefits better reflect the impact of the condition and assist the claims function via a reduction of outright claims declinature. They maintain premiums at a constant level at a time when traditional CI premiums and benefits would cease and allow multiple claims to be made.

There is however a potential drawback in that the introduction of further thresholds within a product increases the potential for dispute over the level of benefit to be paid.

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Waiting period A waiting period, also known as a moratorium or exclusion period, is the requirement that a policy should be in force for a certain minimum period, usually three months, before the insured is covered. In other words, any illness occurring within the waiting period is simply not eligible for benefit payment.

The background to the imposition of this restriction lies in anti-selection. Claims experience in many markets has shown a disturbing tendency to be biased towards the first three policy months, particularly for conditions in which someone might recognize or suspect signs or symptoms and delay consulting a doctor – an example is breast cancer.

To counter such anti-selection, a delay is introduced between policy inception and the commencement of cover.

Such clauses are often imposed only on non-acute conditions (e.g. cancer, multiple sclerosis) as such conditions are most exposed to possible antiselection. This overcomes the drawback of not providing protection for genuine early, usually acute, claims.

Survival period For stand-alone CI benefits there is usually a requirement that the insured survives a specified period after the incidence of a covered condition before becoming eligible for benefits. The specified period will typically be 14 to 30 days.

The reason for this stipulation is that the insurer must be able to establish the validity of a CI claim and that this can be difficult if the insured dies immediately or very soon after the event. It also ensures that payment is made only for the intended purpose of assisting with the financial needs associated with surviving a critical illness.

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Non-contestability clause Depending on the regulatory environment, a further product restriction may be imposed in the form of a non-contestability clause. This restricts the ability of the insurer to investigate suspected non-disclosure to a defined period; usually two to five years from policy commencement. Exceptions may be made for fraudulent non-disclosure but, in practice, non-disclosure is only investigated within the contestable period.

A pricing margin is required to offset the additional costs that result from non-disclosure, meaning that policyholders who fully disclose effectively continue to subsidize those who do not. In addition, more strict underwriting at application is required as a full claim assessment would not be possible.

Buy-back options This was a development in the Australian market and has grown in popularity elsewhere. It allows restoration of a percentage of life cover based on the length of survival following a critical illness event.

The buy-back option recognizes the problem that with a pure accelerated product, once the benefit has been accelerated, the policyholder is left with no or minimal life cover at a time when they are least able to take out further cover owing to their medical status.

It is also possible to buy back CI cover to protect against the effects of a second critical illness event. As with the life cover buy-back option, it is usual to insist that a specified period must elapse following the first claim before cover can be reinstated. Certain conditions may be excluded following a first claim. The term of the reinstated policy is also usually limited to a maximum of 10 years.

Increase in cover options Some options allow increases without further medical underwriting on proof of certain life events, e.g. marriage, birth of a child. Others are related to inflation-proofing and levels can be selected at the outset in return for an appropriate addition to the premium.

Paying in advance for surgery Many surgical definitions have been adjusted so that a proportion of the benefit is paid on confirmation of the need for surgery and the remainder on completion. This better meets the need where the product is sold on the basis of meeting medical costs.

Child cover This can be included automatically in parental cover without individual underwriting of the child/ren covered. Alternatively, it can be structured as an additional rider or stand-alone cover packaged with other child benefits, e.g. education funds.

Exclusions CI products typically incorporate the following exclusions: • • • • • • • • •

alcohol or drug abuse criminal acts flying hazardous sports and pastimes HIV/AIDS living abroad self-inflicted injury unreasonable failure to follow medical advice war and civil commotion.

As part of reducing complexity and encouraging consumer trust in the product, there is a trend towards removing exclusions as far as possible and accommodating these risks in the pricing basis.

Exclusions to specific conditions can also be applied; however, they increase the public perception of product complexity and may be hard for intermediaries to fully understand.

Cover can start from birth or be delayed until the child has passed the age at which it is most vulnerable to serious illness or accident. Exclusions may be used to control the risks of deliberate harm, hereditary or congenital conditions.

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Pre-existing condition exclusions These are often used in group and child covers.

There are two main forms: • A general statement excluding any claim directly or indirectly related to any pre-existing condition.

• A specified list of what constitutes a pre-existing related condition for each of the covered CI conditions; for example for heart attacks, pre-existing high blood pressure and high cholesterol levels would be among the related conditions that would prevent payment.

The existence of these exclusions is often not advertised at the point of sale and customers may not realize that the cheaper cost is owing to restricted cover. Alternatively, an employer may not sufficiently explain the detailed terms and conditions of a group benefit. These issues manifest themselves when a claim is made and can lead to disputes.

Packaging CI insurance with other products Linking CI insurance with other insurance needs beyond life insurance, especially short- and long-term disability risks, hospital cash, medical expense and long-term care, can create attractive propositions.

Income Protection This single product combines both the benefits of Income Protection and CI policies. By replacing an individual’s income when they are unable to work and/or providing a benefit should a devastating CI condition be diagnosed (even whilst still working) ensures comprehensive cover for the policyholder.

Although with generally smaller fixed amounts, the CI benefit can be paid several times during the policy term for unrelated CI conditions should they meet the criteria. Certain CI conditions, such as TPD, would not normally be covered within such a product.

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Hospital cash This cover leads to relatively small-value but highfrequency claims with a greater vulnerability to abuse and lower scope for full investigation due to the costs involved. Unless there are nationally agreed standards in place for the length of stay per condition, it can be difficult to challenge an apparently inappropriate length of stay. Limits can be built into the product design, but these may encourage claiming up to the maximum allowed.

Medical expenses This product suffers from some of the same issues as hospital cash and, in addition, the costs of treatment can be artificially inflated if there are no safeguards in place. If the product is designed and marketed as providing benefits to pay for experimental or life-saving treatment, the consequences of declining a claim are potentially damaging to the insurer’s brand and reputation.

Long-term care (LTC) CI insurance is designed to cover people of working age and it usually has maximum age limits. However, it can be converted on reaching these limits into a product that meets some retirement needs. This is facilitated by the inclusion of TPD benefits defined according to ADLs, these lend themselves to a LTC claims trigger and make the conversion simpler.

Niche products While some companies have packaged CI with other insurance products, others have moved towards niche CI products aimed at a specific target market.

Cancer only “Cancer-only” products are enjoying an increase in popularity. They offer a cheaper alternative to traditional, comprehensive CI insurance, while covering the major cause of claims and, in some cases, forms of cancer that would be excluded from the traditional cover.

Cut-price “core benefits” products operate on the same principle, offering a cheaper alternative to comprehensive CI insurance. The customer makes a conscious choice to purchase a limited cover, with full awareness that not all critical illnesses are covered.

Gender-specific Products designed specifically for women have been growing in popularity around the world, since their emergence in a number of Asian markets as a variation on the CI concept. They typically cover the main risks to female health, including forms of cancer that would not be covered by traditional CI products, and complications of pregnancy.

There is also an emerging trend towards the development of male-orientated options in some markets, such as additional riders paying for levels of prostate cancer not typically covered. This has been slower to develop, as traditional CI insurance already covers the major risks to male health.

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Critical Illness Conditions

Depending upon the market and specific aim of the product, the number of conditions covered under CI insurance can vary significantly from a simple cancer-only benefit to a more complex product offering close to 40 covered conditions with additional options available.

The trend towards competing on the number of conditions has largely slowed owing to the introduction of standardized definitions in some markets. This followed the recognition that the list can never be complete, that the added complexity was confusing customers and intermediaries and thus damaging sales, and that the vast majority of claims in all markets still arise from cancer, heart disease and stroke.

In this chapter we include examples of U.K. ABI standard and non-ABI standard CI conditions.

U.K. ABI standard definitions The standardization of the core CI conditions in the U.K. has been seen as a positive move towards making the product easier to understand for both the intermediary and customer. Deviations from the standardized wording can be made, but only if they are more beneficial to the customer, such as the removal of an age restriction under Alzheimer’s disease.

In 2007, after consultation with the life insurance industry, the ABI reviewed the definitions for 23 of the core CI conditions 1. Below we have listed some of the more interesting ones along with our comments.

Any malignant tumor positively diagnosed with histological confirmation and characterised by the uncontrolled growth of malignant cells and invasion of tissue. The term malignant tumor includes leukemia, lymphoma and sarcoma.

For the above definition, the following are not covered: • All cancers which are histologically classified as any of the following: – Pre-malignant, for example essential thrombocythaemia and polycythaemia rubra vera – Non-invasive – Cancer in situ – Having either borderline malignancy; or – Having low malignant potential

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Cancer – excluding less advanced cases The cancer definition shown in the box below is responsible for the highest proportion of claims in all markets and has undergone significant transformation since it was first developed. In markets outside of the U.K., the list of excluded stages and forms of cancer may need to vary.

As diagnostic techniques and treatment advance, the trend is to exclude earlier stages of cancer even where malignancy is confirmed. For some products, the earlier stages have effectively been moved into a rider option or a tiered structure that pays a smaller percentage of the sum assured leaving the main definition for more advanced stages of cancer that have a greater impact.

• All tumors of the prostate unless histologically classified as having a Gleason score greater than 6 or having progressed to at least clinical TNM classification T2N0M0 • Chronic lymphocytic leukemia unless histologically classified as having progressed to at least Binet Stage A • Any skin cancer other than malignant melanoma that has been histologically classified as having caused invasion beyond the epidermis (outer layer of skin).

Source: Association of British Insurers (ABI), Statement of Best Practice for Critical Illness Cover, April 2006.

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Coronary artery by-pass grafts – with surgery to divide the breastbone The undergoing of surgery requiring median sternotomy (surgery to divide the breastbone) on the advice of a consultant cardiologist to correct narrowing or blockage of one or more coronary arteries with by-pass grafts.

The requirement for surgery to divide the breastbone reflects the development of minimally invasive surgery that is suitable for an increasing number of patients. Coronary artery by-pass grafts with minimal invasive surgery is not covered as standard in the U.K. However, some companies pay a proportion of the full benefit for minimally invasive surgery as part of their product structure.

It is important that insurance products do not inadvertently influence the choice of treatment by creating a disproportionate financial reward for one treatment option over another.

Heart attack – of specified severity Death of heart muscle, due to inadequate blood supply, that has resulted in all of the following evidence of acute myocardial infarction: • Typical clinical symptoms (for example, characteristic chest pain) • New characteristic electrocardiographic changes • The characteristic rise of cardiac enzymes or troponins recorded at the following levels or higher: – Troponin T > 1.0 ng/ml – AccuTnI > 0.5 ng /ml or equivalent threshold with other Troponin I methods.

The evidence must show a definite acute myo cardial infarction.

For the above definition, the following are not covered: • Other acute coronary syndromes including but not limited to angina.

This definition results in a high proportion of claims in the U.K. and other western markets. It has undergone significant transformation since it was first developed in line with advances in diagnostic techniques, particularly the use of Troponins.

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AccuTnI is a proprietary analysis that may not be common in all markets. Definitions may need to be adapted to suit the methods in local usage and to take into account variations in the accuracy and reliability of the respective diagnostic techniques.

HIV infection – caught (in the U.K.) from a blood transfusion, a physical assault or at work in an eligible occupation Infection by human immunodeficiency virus resulting: • From a blood transfusion given as part of medical treatment • From a physical assault or • From an incident occurring during the course of performing normal duties of employment (from the eligible occupations listed below) • After the start of the policy and satisfying all of the following: – The incident must have been reported to appropriate authorities and have been investigated in accordance with the established procedures – Where HIV infection is caught through a physical assault or as a result of an incident occurring during the course of performing normal duties of employment, the incident must be supported by a negative HIV antibody test taken within 5 days of the incident – There must be a further HIV test within 12 months confirming the presence of HIV or antibodies to the virus – The incident causing infection must have occurred in the U.K. For the above definition, the following is not covered: • HIV infection resulting from any other means, including sexual activity or drug abuse.

In the U.K., there have been less than 10 documented cases of occupationally acquired HIV infection in healthcare workers, although the majority of these had also worked in high-risk countries and were presumed to have been infected outside of the U.K. The number of cases has been further reduced by the introduction of post-exposure prophylaxis procedures. The claims incidence may vary in other markets dependent on the levels of risk and procedures in place for dealing with occupational exposure.

Multiple sclerosis – with persisting symptoms A definite diagnosis of multiple sclerosis by a consultant neurologist. There must be current clinical impairment of motor or sensory function, which must have persisted for a continuous period of at least six months.

The primary healthcare approach in the U.K. and international diagnostic standards for multiple sclerosis (MS) have significantly changed since this condition was first included in CI cover. It is now common for people to be referred for an MRI scan on first consulting with MS symptoms, and to be given a diagnosis regardless of whether symptoms continue or subside. This creates disparities between claimants who have received a devastating diagnosis and a definition that excludes those with minor short-lived symptoms.

It is difficult for these latter claimants to understand why their claims are rejected. However, the requirement for persisting symptoms is felt to be necessary to protect the portfolio from potential advances in diagnostic techniques that could identify MS in currently asymptomatic patients.

This is coupled with a trend towards greater use of MRI scanning for other reasons, which could potentially pick up incidental findings of characteristic MS plaques in asymptomatic subjects.

U.K. non-ABI standard conditions Several non-ABI standard definitions are or have previously been used in the U.K. Some wording examples are listed below, along with our comments.

Angioplasty The undergoing of any interventional technique, on the advice of a consultant cardiologist, involving the use of transluminal coronary catheters to correct significant stenosis of at least 50% diameter narrowing of two or more coronary arteries as part of a single procedure. Angiographic evidence to support the necessity for the above operation will be required.

This definition has now been removed from the U.K. ABI list and from many U.K. companies’ products as it has become a very common

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procedure that is difficult to price. It also has minimal impact on the patient in most cases.

In some products it is included but with a reduced percentage of the full benefit payable.

Carcinoma in situ resulting in total mastectomy Carcinoma in situ of the breast which is treated by total mastectomy, that is the removal of all of the tissue of one breast. Before a claim can be paid evidence must be provided confirming: • A diagnosis of carcinoma in situ of the breast; and • That treatment by total mastectomy has taken place.

This is usually included either as part of a rider to a full CI product or as part of a cancer-only or female-CI product. The presence of a benefit payable on mastectomy is a useful aid to claims assessors in the event that the underlying cancer does not meet the definition in a traditional CI product. To decline a claim outright to someone who has undergone mastectomy is a sensitive issue with potential for reputational damage.

Insulin-dependent diabetes The diagnosis of insulin-dependent diabetes mellitus after the life insured’s 45th birthday by an appropriate consultant physician. The insured must have been insulin-dependent for at least 12 months before a claim can be made. Diabetes mellitus that can be treated by any method other than the use of insulin by injection is explicitly excluded.

The age requirement restricts the incidence of claims as most insulin-dependent diabetes develops at younger ages. This can be confusing for customers at the point of sale who may not have been shown the full wording and may not realize that not all diabetes is covered. Although originally this definition may have had the intention of addressing insulin-dependent diabetes, noninsulin-dependent diabetes may well require treatment with insulin for adequate glycaemic control. With the incidence of type 2 diabetes likely to rise in developed societies, the inclusion of this definition will have a significant impact on the cost of claims.

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Pricing

Pricing begins with actuarial analysis of the available risk data, and as with all forms of risk there are many considerations and adjustments to be applied before the data can be used as a meaningful and reliable component for risk acceptance. We elaborate on those aspects of CI pricing which require particular attention: the methods, issues and uncertainty involved in estimating the current level and future trend of incidence rates.

Deriving incidence rates There are two common approaches to deriving incidence rates for CI cover. The first starts with population statistics and adjusts these to represent the insured population, while the second uses as its basis the insured claims experience.

Population statistics will be more credible than insured claims experience but will be less directly relevant. The choice of approach depends upon the available data sources; none is likely to be ideal on its own and value is gained by comparing the results from both approaches. Typically, the more credible population data could be used to give a shape of incidence rates by age, whereas insured experience could be used to determine the level of the rates.

Using population statistics to derive incidences We outline the most common method of using population statistics to create CI incidence rates.

This method is illustrated in more detail by the Staple Inn Actuarial Society (SIAS) papers describing the creation of the U.K.’s CIBT93 and CIBT02 population base tables2.

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Statistics related to critical illnesses can be obtained from many sources, including the World Health Organization (WHO), government statistical departments, charities and research papers from medical or academic institutions. Such statistics are likely to be credible and highly detailed, at least for the CI conditions which contribute most to the overall rates, but are generally based on a wider or different population from that of the insured population. Hence, adjustments must be made.

Wherever possible, expert medical advice should be sought to help interpret the statistics correctly and to ensure that any judgments in the absence of directly comparable data are reasonable.

Each critical illness should be considered separately. The quality and quantity of the statistics will vary by illness. Population data may be available by age and sex but is unlikely to be available by smoker status. Data is also more likely to be available for death by cause and for prevalence of disease than for pure critical illness incidence; in which case, indirect methods must be used to build the rates. For some illnesses it may be necessary to rely on data from other countries.

“Dread Disease Cover – An Actuarial Perspective” 1990 Dash, Grimshaw “A Critical Review” 2000 Dinani, Grimshaw, Robjohns, Somerville, Spry, Staffurth “Exploring the Critical Path” 2006 Robjohns, Galloway, Morris, Reid, Wells www.sias.org.uk

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The starting point should be to ascertain the annual incidence of each critical illness as a proportion of the population for each gender and age or age band. The statistics should be modified to fit the definition of each condition as closely as possible; for example, by excluding less severe cancers if these are not covered. Due to time lags in publication, data may require rolling forward to bring it up to date with the time of pricing.

The following adjustments may then be required to more closely mirror the nature of CI insurance.

The significance of these adjustments will depend on the particular critical illness being considered.

• The incidence rate being determined should reflect the probability of a “healthy” person having a critical illness. In which case, the denominator reflecting the total population should be multiplied by:

• The data available may not be fully representative. For example, deriving incidence rates for critical illnesses from hospital admissions data would not include cases which were not admitted to hospital, perhaps due to sudden death. Data believed to be incomplete should be grossed up.

• A CI benefit is only paid out to an individual on their first incidence of the illness; statistics including multiple incidences for any one individual will therefore need to be adjusted to reflect this feature of CI cover.

• People who have one critical illness may also meet the definition of another. As the CI benefit is only paid out once, incidence rates should be adjusted for this overlap. For example, a large number of coronary artery by-pass grafts (CABG) will follow a heart attack. Both fulfill the definition of a separate critical illness.

This overlap should be determined and deducted from the incidence rates.

Each derived incidence at this point is typically denoted ix . One of the following adjustments is then required, depending on the type of CI cover:

(1 – cx) where cx is the prevalence of the particular critical illness at age x.

If an overlap with another critical illness has been identified, the denominator should be reduced further accordingly.

Stand-alone CI adjustment Stand-alone benefit is only paid if the insured life is diagnosed with a critical illness and does not die during the survival period. The probability of surviving this period must therefore be determined and applied to the incidence rate. The adjustment made will vary between immaterial (e.g. multiple sclerosis), to very significant (e.g. strokes and heart attacks).

Accelerated CI adjustment An accelerated CI benefit is paid out on first occurrence of either death or critical illness, therefore the additional mortality incidence needs to be added to the incidence rate. The total incidence rate required for accelerated CI is typically 3 modeled as: ix + (l – kx) qx where ix is the critical illness incidence rate qx is the overall population mortality rate k x is the proportion of deaths caused by each critical illness (based on cause of death data).

3

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“Dread Disease Cover – An Actuarial Perspective” 1990 Dash, Grimshaw

Population data is usually provided in age bands, so rates for individual ages must be interpolated and then graduated in order to obtain a full table.

Having determined the individual incidence rates for CI cover for the general population, further adjustments are required to reflect the risk factors applicable to the actual insured population.

Adjustments to population incidences for insured lives Insured critical illness incidences are usually lower than for the general population due to a different socioeconomic profile and the impact of risk selection and underwriting.

The socioeconomic profile of the general population will not be representative of insured lives, for which incidence rates will be on average lower. The extent of the differences will depend on access and attitudes to medical care, diet, smoking and alcohol habits and other lifestyle differences, and will vary by CI condition. For example, higher socioeconomic groups have been shown to have lower incidences of strokes and heart attacks than lower groups. However, this is not always true for cancers and multiple sclerosis. It is generally considered more likely that people in higher socioeconomic groups will seek medical attention and receive regular health check-ups and scans; some conditions are therefore detected earlier (increasing the incidence rates for younger ages) even if the underlying risk factors are lower.

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Established claims experience is ideal for estimating the appropriate adjustments to be made to population based incidence rates (refer to the following section for considerations associated with the use of claims experience). For markets which do not have insured CI experience, inference could be drawn from data on variation in CI conditions by socioeconomic group and also from the relationship of population and insured mortality by cause. For new markets with poor domestic data, high level international mortality/morbidity comparisons could be used to adjust the insured rates from other countries.

The claims experience in the early years of a CI policy will depend heavily on the underwriting process; strict underwriting and good access to policyholder records improve the result. The impact will vary by CI condition: for example, the underwriting process is currently better at detecting the risk factors for heart disease than it is for cancers. Conversely, anti-selection may take place if individuals who suspect they have developed a condition take out a policy before seeking medical attention. Certain markets operate a three-month waiting period, on some or all conditions, to combat this anti-selection risk.

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Using claims experience to derive incidence rates In most CI markets there is still a scarcity of credible claims experience, although market-level pooled experience collected by reinsurers and professional groups, such as the Continuous Mortality Investigation (CMI)4 in the U.K., may be available. Even in markets with comprehensive industry-wide studies, results must be treated with care; credibility can become an issue as soon as the results are divided up into segments. However, it is still beneficial to analyze the available market data to begin to understand how this relates to the population experience or to the insured claims experience in other countries.

Claims experience may cross periods of time where marketing, underwriting and/or claims practices have changed. Own company data can be adjusted for this as the changes will be known, but it may be impossible to adjust merged industry data where differences in claims experience could be due to differing sales channels, underwriting practices or conditions covered. If the claims experience of each company cannot be separated out, historical trends in the data cannot be accurately interpreted.

Claims experience can vary significantly by company, so pooled market experience may give a misleading indication of the level of claims for the business being priced.

While the number of claims will build up relatively quickly, the claims experience will initially be concentrated on the younger ages and the select period years. It will take several years before enough ultimate experience is built up in order to be confident of how long a select period is.

Industry data collected by the CMI in the U.K. currently indicates a select period for CI business which is shorter than that for assured mortality business. A shorter select period can be explained as lives that are healthy at underwriting stage will typically suffer from a CI condition before dying and therefore accelerate the claim. In addition, there may be less of a select effect for CI business than for life-only business due to increased anti-selection or perhaps the presence of critical illnesses which cannot easily be underwritten.

The starting point for analyzing claims experience is usually notified claims. A declinature rate should be applied to any claims which are pending a decision. There is generally also a delay between the incidence date of a claim and the date it is notified. When analyzing insured claims experience, an allowance for such incurred but not reported (IBNR) claims should be added to the notified claims (see additional “Recording claims dates� comment below). IBNR forms a significant element of a critical illness experience study because changes in experience over time may be due to previous under or over-estimation of IBNR, rather than to actual changes in the risk. The average delay periods for the U.K. (CMI data5, all critical illness conditions 1999–2002) are as follows: Diagnosis to notification Notification to admittance Admittance to settlement

5 4

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www.actuaries.org.uk/knowledge/cmi

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114 days 55 days 7 days

Presentation at Current Issues in Critical Illness Seminar Dec 2004 http://www.actuaries.org.uk/__data/assets/ pdf_file/0014/30263/GrimshawD.pdf

Specific delay patterns vary by CI condition.

Furthermore, it may take several years before all the claims from any one year of exposure are reported and settled. Policyholders may not understand or remember the policy well enough to know that they are able to claim which partly explains the delay in notification. The delay to admittance is due to difficulties in establishing the level of severity of an illness and the permanence of disability for many CI conditions.

The final estimates of insured incidence rates including IBNR should be compared to the corresponding population incidences to check reasonableness and to increase the confidence in the results.

Recording claims dates To enable better estimates of IBNR it is essential to record all the following dates pertaining to a claim: • • • •

diagnosis notification admittance settlement.

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It is also essential to define what these dates represent and to record them consistently over time. In particular, the date of diagnosis for a cancer claim could be interpreted as when the symptoms were first noticed, when a consultant confirmed cancer was present or when the condition later deteriorated to be severe enough to meet the definition of the cover. The date of notification could be interpreted as when the policyholder first contacts the insurance company, when a completed claim form is received or when all medical evidence is received. The data initially collected in the U.K. by the CMI had low levels of completion of the claims dates and inconsistent recording bases, which led to complications in determining IBNR. The data completeness has since improved and furthermore the CMI is now seeking to introduce consistency of diagnosis dates across their contributors, where the definition is “The date at which the CI definition is fulfilled”.

This claim date definition can lead to the situation where a claim notification date is earlier than the diagnosis date, for example, where the condition does not initially meet the CI definition or where the insurer is informed of a planned surgery.

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Estimating future trends in critical illness incidence rates Actuaries face many challenges when estimating future changes in mortality – the issues are even more complex when considering critical illness.

Drivers of change in CI incidence rates Changes in critical illness incidence will be mainly driven by medical advances, changes in social behavior and regulatory rulings. Regulatory changes are somewhat unpredictable and are likely to cause a sudden step change in incidences.

However, past trends of either critical illnesses or of associated risk factors must be studied as an aid to understanding how incidences may change in the future. The two examples presented later in this section demonstrate particular features of historical cancer trends in the U.K. Medical advances impact critical illness incidence in a variety of ways, as they affect the diagnosis and treatment of both critical illnesses and less severe conditions, which may be correlated with the critical illnesses. On the whole, medical advances reduce mortality from all critical illnesses, but this does not necessarily imply a reduced critical illness incidence. Reduced incidences of critical illness will be caused by improved treatment or earlier diagnosis of more minor conditions which prevent a more serious CI condition from developing.

Conversely, improved detection techniques will increase the incidences of critical illnesses where the detected illness has already met the definition of the CI insurance.

It is important to consult medical opinion for advice as to how population trends in critical illnesses may change in the future. What medical advances are anticipated, and will these improve critical illness incidence by preventing conditions becoming critical, or worsen incidence by detecting the illnesses earlier?

Changes in social behavior vary by country but may include a move to more sedentary lifestyles, poorer diets, increased alcohol intake and illegal drug abuse. All of these will have a negative impact on incidences of critical illness, although the trends are very difficult to predict.

Increasing obesity in many countries around the world is now a serious risk factor for worsening critical illness incidence, in particular for heart disease, stroke and certain cancers. According to the WHO, obesity has increased more than threefold since the 1980s in areas of North America, the U.K., Eastern Europe, the Middle East, Australasia and China6. With increased obesity affecting children as well as adults, the trend is not one which will easily be reversed despite the health initiatives introduced by many governments.

On the plus side, there is more awareness of the impact of lifestyle on health and more knowledge about specific illnesses.

If a CI benefit is paid out on surgery rather than on diagnosis of a particular condition, advances allowing surgical procedures to become more common could have a significant impact on incidences.

6

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World Health Organization www.who.int/dietphysicalactivity/publications/facts/ obesity/en/index.html

The following chapter on Risk Considerations describes the main causes of the risk of future changes in critical illness incidences being greater than expected and also outlines steps that can be taken to manage these risks. When setting assumptions about future trends in critical illness incidences it is important to consider how many of these risk controls have been put in place.

Examples of historic cancer trends in the U.K. Example 1: Impact of Screening on England and Wales Breast Cancer Incidences When screening was introduced, there was a sudden increase in the incidence rate for the age range included in the screening program (figure 1).

350 300 Incidence Rate per 100,000

250 200 150 100

1991

1993

1995

1997

1995

1997

1999

2001

2001

1989 1993

1999

1987 1991

1985

1983

1981

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1989

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Year 1971

Incidence Rate per 100,000

Figure 1 Breast cancer incidence rates by age band 1971 to 2001.

350 The incidence rates demonstrate the impact of a screening campaign 300 introduced between 1988 and 1991 for women aged 250 50 to 65.

45–49 Data source: U.K. Statistics 50–54 200 Authority 7.

55–59 60–64 150 45–49 65–69 50–54 100 55–59 60–64 50 65–69

The incidence rate for the 50 to 54 age group continues to increase as more women of this age group enter the regular screening program. In contrast, after a few years, incidence rates fall again for the older age ranges (55 to 65) because these women had by then already been screened at a younger age. However, they remain higher than their pre-screening level. Note also that incidence rates for the 66–70 age group fell slightly once the screening was introduced as cancers were detected earlier. Therefore, the introduction of a screening program has been shown to cause a short-term spike in incidence rates as well as a longer term step change with a materially altered pattern of rates by age.

Year

7

“Cancer Trends in England and Wales 1950 to 1999” National Statistics and subsequent update www.statistics.gov.uk/downloads/theme_health/ CancerTrendsUpdates.pdf

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Example 2: Changes in cancer morbidity and mortality Underlying trends in opposing directions can offset one another and result in a misleading, stable picture of aggregated critical illness incidences. The bubble graph (figure 2) of trends from 1971 to 2001 in cancer mortality and morbidity for males aged 45 to 54 illustrates this point. The size of each bubble indicates the relative importance of the cancers. The graph shows that some cancers have reduced incidences and associated mortality over time, but that more cancers fall into the upper right quadrant indicating increased incidences and mortality. For example, lung cancer incidence and associated mortality have both fallen over the period shown, but this is offset by an increased incidence and mortality of melanoma.

Bladder NH Lymphona Brain Oesophagus Colorectal Prostate Kidney Stomach Lip, mouth, pharynx Lung Melanoma NH Lymphona Oesophagus Prostate Stomach

0.08 0.06 0.04 0.10 0.02 0.08 0.00 0.06 –0.02 0.04 –0.04 0.02 –0.06 0.00

–0.02

–0.06

–0.04

–0.02

–0.00

0.02

0.04

Change in Mortality % pa –0.04 –0.06 8

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Setting assumptions for future trends Past trends are a reasonable starting point for future trends. Past trends in population incidences should be analyzed for each of the main CI conditions, if possible by gender and age band.

Insured data, if available, is unlikely to be sufficiently credible and will contain distortions caused by change of business mix and the underwriting process. The historical trends of each critical illness will show very different patterns and it is useful to study these to improve understanding of how changes such as medical treatments or other risk factors affect incidence rate.

0.10

Change in Incidence % pa Change in Incidence % pa

Figure 2 Changes in cancer morbidity and mortality from 1971 to 2001 for males aged 45–54.

Underlying incidence trends can offset one another, giving a misleading picture of aggregated Bladdercritical illness Brain incidences.

Colorectal Data source: U.K. Statistics Authority 8.

Lip, mouth, pharynx Lung

The reduction in incidences and deaths from lung cancer has been particularly significant for males across all age ranges largely due to a lower prevalence of smoking. However, separate premium rates are calculated in the U.K. for smokers and non-smokers, so the premium rates for CI insurance are usually not affected by this specific trend.

–0.06 –0.04 –0.02 –0.00 “Cancer Trends in England and Wales 1950 to 1999” National Statistics and subsequent update Change in Mortality % pa www.statistics.gov.uk/downloads/theme_health/ CancerTrendsUpdates.pdf

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0.02

0.04

As usual, it is important to treat the data with care.

For example, increased hospitalizations may be due to a change in treatment practice or a change in how the admissions are recorded rather than to an increase in the underlying incidence.

When determining assumptions for future insured trends, it is essential to bear in mind the actual definition for each covered CI condition as details of the definition may mean that the insured trend would not be expected to be in line with the population experience.

Although exact views on the trend of future critical illness incidence rates vary, it is generally agreed that incidence rates will on average deteriorate.

Many products are sold with long-term premium guarantees; worse than expected results will therefore result if the extent of future deterioration is underestimated.

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Risk Considerations

Risk management is key to achieving success. Reinsurance can be used as a risk management tool but additional risk management is essential to avoid poor results on any retained share. To manage risk it is important to understand the sources, levels and interactions of risk, and thus to set aside appropriate capital and to take action where possible to mitigate risk.

The strategic, assumed and operational risks common to all lines of insurance are also inherent in CI business. In this chapter we focus on the risks which specifically apply to CI insurance and on possible ways to mitigate or control these risks before reinsurance.

This will tie together many of the issues raised in the other chapters of this publication.

Insurance risk The pricing best estimates for the claims experience are based on risk factor assumptions for the incidence and future trend of each critical illness. Actual claims will deviate from these estimates. This deviation (or “volatility”) is typically greater for CI insurance than for mortality business due to the more complex risk factors involved. We describe here the particular risks that relate to the setting of these assumptions.

Estimate of base incidence rate The Pricing chapter demonstrated how estimates of initial incidence derive from the available insured, industry and population data. The following risks are involved:

• The select period of the insured claims data may not be clear; this can lead to an underestimation of the ultimate level of past experience.

• Industry data will contain data relating to insured CI conditions which may differ between insurers and/or have changed over time. In addition, the underwriting, sales and claims processes of the contributing companies will vary. Due to constant change both of industry practice and CI products, industry data cannot be used without complex adjustments to take such irregularities into account and will not necessarily be representative of any one portfolio. Despite this, industry data is useful due to the credibility issues, especially at older ages and later durations, that arise when looking at the past experience of one insurer only.

• Adjustments to population data may be required to align the data to the specific portfolio and product cover. The assumptions made to do this are often very subjective and thus greatly increase the risk of insufficient final incidence rates.

• Insured claims data may contain an insufficient allowance for incurred but not reported (IBNR) claims.

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Changes to incidence rate over time Even estimates of incidence rate that are initially a good fit for actual experience may not continue to fit well over time. The main experience drivers are developments in medical science and social behavior. The effect on incidence rate can be a sudden step change, a gradual trend that affects all ages, or a gradual change by age cohort. When premium rates are guaranteed for several years, a deterioration component is usually included in the incidence assumption, but even with this many unknown factors will determine how the claims experience actually develops.

Developments in medical science Developments in medical science affect how critical illnesses are prevented, diagnosed and treated, and can either increase or decrease the incidence of CI claims. Screening programs and new diagnostics and surgical procedures are mostly responsible for incidence rate increases.

The timing and impact of new screening programs on incidence rates is difficult to anticipate; it depends on medical science making screening feasible, the influence of governments providing financing and the take-up rate of the screening.

While screening can increase cancer incidence, it can lead to reduced CI claims if the cancers are detected and treated before they become severe enough to qualify for a CI claim under the CI condition definition. Ensuring that the definition for CI conditions requires an appropriate level of severity to be satisfied (such as a Gleason score of at least six for prostate cancer) mitigates the risk of screening increasing the incidence rate without a corresponding severity of condition for the policyholder. In the previous Pricing chapter we showed how the introduction of screening for breast cancer caused a short-term spike in incidence as well as a gradual long-term increase.

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In some cases, medical diagnostics enable doctors to identify conditions before symptoms manifest themselves. Advances in diagnostics could result in a much larger number of claims as well as claims occurring at an earlier age, even if the insureds were not actually suffering from the condition at the time of claim. If such a potential exists, the particular definition can be appropriately worded to ensure that the condition has become sufficiently severe. For other conditions, adding a general clause such as “resulting in permanent symptoms” will help to control this risk.

Several CI definitions refer to a surgical procedure rather than diagnosis of a critical illness. Improvements in medical technology can lead to turning what was once a traumatic operation into a more routine procedure. For example, angioplasty can now be performed using keyhole techniques requiring minimal recovery times; the operation is now performed more frequently and on older patients. For this reason, angioplasty is no longer usually covered by CI insurance in the U.K. To mitigate the risk of increased claims incidence due to surgical procedures becoming more routine, the definition should include criteria such as “requiring division of the breastbone” or other appropriate wording to ensure meaningful severity.

On the other hand, it is important that the need to add additional clauses to the CI definitions, such as described above, to mitigate risk to the insurer, does not prevent the provision of cover if the policyholder suffers from a serious critical illness.

Social behavior Changes in social behavior, such as increased obesity and changes in smoking, alcohol and drug habits, and the associated impact on critical illness incidence are difficult to identify, assess and measure, and even more difficult to predict.

Rather than causing sudden step changes, these trends are likely to be gradual cohort trends, either increasing or decreasing, reflecting an accumulation of changed behaviors affecting a generation.

While underwriting can exclude or rate (by imposing an extra premium) the applicants at higher risk, it is not possible to remove these risks altogether.

If a large proportion of insured lives are rated for changes in social behavior, for example due to predicted increasing obesity levels, it is even more important that the ratings are appropriate.

Drug abuse has become more prevalent in many countries while the long-term impact of this on health is still unknown. The use of drug testing on application and drug-abuse related exclusions are not likely to be able to adequately mitigate this risk.

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Shock risk In mortality business, the worst case claims scenario is an occurrence that simultaneously impacts a large percentage of the risk portfolio, such as a flu pandemic. Such occurrences are often referred to as “shock losses” – losses which have the potential to materially damage the economic value of the company holding that risk.

In CI insurance, similar claims scenarios are less likely as the definitions themselves limit this risk.

The worst case “shock loss” scenario for CI insurance is probably a step change caused by an increased critical illness incidence or detection, such as following screening. As discussed above in the section on “Developments in medical science”, such sudden, high severity changes can be mitigated with suitable CI definitions.

Reinsurance solutions are another highly effective tool with which to mitigate shock risk.

Correlation with mortality risk Despite sharing risk factors with mortality business, such as changes in health practices, an element of diversification is introduced when writing CI business alongside mortality business. For example, a deterioration in the claims experience of CI following improvements in medical science (such as from increased illness detection and new operating procedures) is likely to also lead to a lower associated mortality rate.

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Operational risk Internal processes Underwriting and claims assessment is subject to human error. If the required standards are not maintained, claims experience could quickly increase beyond the assumed level in pricing. The risk of inappropriate decisions can be mitigated by implementation of authorization limits for individual underwriters according to their level of experience, routine monitoring of decisions, internal checks to look for common sources of error as well as audits by reinsurers. Underwriters should have access to up-to-date medical knowledge and be able to consult the advising chief medical officer and medical specialists.

As regards claims, in addition to spot-checks, routine monitoring should be made on claims made shortly after a policy is purchased to reduce the risk of anti-selection from non-disclosure of a known illness. Anti-selection may be suspected, but non-disclosure is often hard to prove. Some industries operate a waiting period on certain conditions to reduce this risk.

To avoid systematic non-disclosure from certain distributors, if systems permit, checks should be made to ensure that agents have a “normal� level of smokers or rated policies.

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A lot of CI underwriting can now be done automatically. It is essential that the underwriting systems are rigorously checked in order that an error does not result in an inappropriate underwriting decision being widely applied.

An alignment of interests between reinsurers and insurers is required to avoid additional operational risks arising. Arrangements with reinsurers should ensure that processes, such as for assessing claims or reviewing premiums, are aligned as far as possible. Also, agreements can be made which set out what should happen in the event of an operational error.

Changes to the relevant law, regulations or compulsory instructions issued by industry bodies Legal rulings on the interpretation of CI definitions can cause a sudden step change in claims experience. Regular internal legal reviews of CI definition wordings and policy conditions could help prevent this. Here are two specific examples of revisions in the U.K. which have affected CI business.

The U.K. regulator, the Financial Services Authority (FSA), issued a statement of good practice in 2005 which set out guidelines for reviewing the premiums of reviewable premium CI policies. For many companies, the guidelines would have not been in line with their planned approach for reviewing premiums. In 2008, the U.K.’s ABI provided a statement of good practice for treating customers fairly with regards to non-disclosure. As many claims are declined due to non-disclosure, it is suspected that this change will in practice have a marked impact on claims experience.

Regulatory changes often arise when a financial product is or is not perceived to be operated in line with customers’ expectations. In some cases, a company could avoid the impact of regulatory change by seeking to treat customers fairly at all times, and by influencing the industry and regulator to try to ensure that any changes are reasonable for both the policyholder and insurer.

Reputational risk Reputational risk can follow a specific company’s actions or can affect an industry as a whole or specific product type. The complexity of CI insurance and the subjectivity involved in handling claims increases its risk of negative reputation compared to other life products. We have already seen examples of how the U.K. life insurance industry has taken steps to repair damage to the reputation of CI products which had led to a fall in sales volumes.

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Sales and Marketing

Though it may be exaggerating to say that the arrival of CI insurance in the U.K. in the late 1980s created a sensation, it certainly produced a very significant reaction from intermediaries and consumers.

While Lincoln Life claimed the first actual contract to be marketed, the product generally credited with starting the move towards CI insurance is “Living Assurance” from Abbey Life.

The concept for this originated in South Africa in response to the absence of a state healthcare system to fund expensive medical treatments for major illnesses. The South African product had experienced considerable success despite its rather daunting soubriquet of “Dread Disease”.

In the U.K., early sales were mainly through direct sales force channels. With time, however, the product quickly came to be viewed as highly flexible and as a good “add-on” to life covers, especially when associated with a mortgage.

In this chapter we outline the sales challenges that have surrounded CI insurance and what these can tell us about the key priorities for successful sales.

Positive sales messages Research has consistently shown why the product has been successful – its message is comprehensible. If you suffer from a critical illness covered under the policy, you will be paid, appealing equally to single people as to those with dependents. In addition: • People see the opportunity to benefit themselves.

Whilst no-one welcomes the threat of serious illness, CI insurance offers a financial solution to the problems that ill-health can cause.

• There is flexibility as to how the money is used.

The lump sum payment can fund private medical treatment, be applied to outstanding financial commitments, be used to adapt or move house or to purchase a luxury item or experience that might in some way compensate for the trauma of critical illness.

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• Lump sums are a more appealing proposition than an income. Research indicates that people prefer to receive a lump sum.

• Everyone can identify with CI insurance. Whilst people are aware of the risk of death and may know people who are long-term disabled, research indicates that people associate more readily with CI insurance because everyone knows somebody who has suffered or is suffering from the main diseases that CI insurance covers.

• Critical illness offers wide coverage. The spread of illnesses covered coupled with the TPD benefit satisfies the majority of people that they have ticked all the relevant boxes in terms of likely health risks.

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Evolving sales challenges Annual sales figures indicate that the U.K. CI insurance sales peaked in 2002 at over one million policies. Over 90% of these were in the form of acceleration benefits. Since 2003, the market has experienced a steady downturn in the sales of individual CI insurance. In 2004, total sales were approximately 75% of the 2002 amount; this dropped by as much as 16% in 2005, and by another 16% by 2007. Most sales are through bancassurers in connection with mortgages, and the sales split between IFAs and tied agents has been fairly even over the past three years, notwithstanding the overall decline in sales. The product should still be deemed a success with approximately 20% of the U.K. working population owning a CI insurance policy. Obviously, in such a saturated market it is difficult to increase new sales year on year.

What caused the decline in CI policy sales in the U.K.? In fact, the story is complex and no single cause can be said to be completely responsible; CI has faced a number of difficulties that have changed the sentiment of intermediaries and policyholders, contributing to a reduced popularity.

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“Condition creep” Product success led to supplier competition. One of the initial competitive differentiators was breadth of cover. The U.K. and Irish markets experienced rapid “condition creep”, a situation where ever more spurious conditions were added to the product in an attempt to increase the product’s appeal. With this, companies also applied different terminologies to define medical impairments. This situation created confusion as to what was and was not covered, making it hard for advisers to be certain that they were recommending the most comprehensive cover or most appropriate wording to applicants. Claim declination rates correspondingly increased and the product’s reputation was damaged.

The problem was initially tackled by an industry working party to standardize the key definitions.

Subsequent Codes of Practice from the ABI in 2003 and 2007 have continued this process and attempted to create a comprehensible and level playing field so that intermediaries can in fact be certain that the wording used is appropriate.

Whilst “condition creep” is still potentially a problem, it would be essentially anti-competitive to overly proscribe the conditions covered and would put a brake on potential positive innovation. In addition, the knowledge of intermediaries has subsequently increased, better aligning policyholder and product, and reducing incorrect cover perceptions.

Withdrawal of reinsurance capacity and premium guarantees Undoubtedly the biggest negative influence was the reduction in capacity and stricter terms introduced by the reassurance market in 2003.

By this time, CI insurance was a mature product and worrying claims trends were emerging.

Observers had voiced concerns over the ability to “future proof” the product. Given the pace of medical advancement it was felt that what was a critical health problem in 1988 might not be anything like as serious in 2003 and that there was therefore a risk of paying claims on the occurrence of medical problems that could in fact now be very effectively treated.

Guaranteed premium rates had been positively received by intermediaries; whilst significantly more expensive, they brought certainty to cost calculations and affordability for the policyholder.

Poor claims experience and concerns over the future development of claims led some reinsurers to freeze or reduce available capacity and to withdraw guarantees on premium rates.

There was also the “windfall” element which proved to be a double-edged sword. Events which were felt to be potentially life-changing were in actuality of no lasting significance and so some early claimants started to benefit from financial settlements akin to inheritances or lottery wins.

Some early sales intermediaries latched onto the sales message that in some circumstances you could suffer a quite legitimate heart attack or stroke, meeting the definitions in the policy conditions fully and yet not be desperately inconvenienced after the initial crisis. This created intra-office tension with salesmen frustrated by the insistence of actuaries, claims and underwriting staff that this product which they could sell was “unsound”. In fact what had happened was that in the quest to find the big new idea, the product designers of CI insurance had taken it out of the context under which it had grown in response to a market need, allowing it to develop an extraordinarily comprehensive and complicated set of conditions.

Mortgage related sales It takes little imagination to anticipate the dislocation to finances caused by serious illness but, unlike Mortgage Payment Protection Insurance (which pays mortgage installments while the insured is unable to work), CI insurance brings the assurance that a mortgage can be fully paid off in the event of serious ill-health. This is a powerful and important sales message. The compactness of fit between life and CI insurance and the taking on of what is usually an individual’s largest debt is a compelling “protection” proposition, and one that had been very effectively sold when concluding mortgage transactions.

The contraction in the mortgage market, for wider economic reasons, was thus also a major contributor the drop in CI insurance sales.

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Underwriting process The complexity and duration of the underwriting process, especially as compared to life covers, are cited by intermediaries as major reasons for disaffection with CI insurance. As more conditions are rated, insurers need to manage the expectations of intermediaries and their clients by outlining their underwriting philosophy at the outset, keeping intermediaries aware of underwriting progress and by trying to find user-friendly innovations to improve the customer experience.

Increasing concerns around TPD Another concern is the high claim declinature rate associated with Total and Permanent Disability (TPD). TPD began as a sensible “catch-all” benefit designed to ensure that no client could suffer a major accident or illness without triggering cover.

In reality, however, this has caused problems because companies vary in their interpretation of what is “permanent” and “total”. Many cases are in dispute and many have ended at the door of the Ombudsman; the consumer media have been quick to pick up on this situation.

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Retrospective changes Intermediaries are deeply concerned by different generations of CI insurance policies containing different cover and definitions, hence the cry for “retrospection”, meaning that intermediaries suggest that as companies have widened and updated their cover and definitions, they should offer the most recent version of their cover to those who previously took out policies with different, often more restricted, cover. This would remove much of the distrust that surrounds CI in some parts of the media, but there are a number of issues which would need to be considered if this happens (as discussed in the Product Design chapter).

Critical Illness and Income Protection There is perhaps a more fundamental issue concerning CI insurance. Despite the appeal of a lump sum payment, sometimes income is a more appropriate long-term solution.

Additionally, the two biggest causes of long-term disability – nervous disorders (especially stress and depression) and muscular-skeletal disorders (especially arthritis and back problems) – are not covered by CI insurance, unless they are sufficiently severe to meet any TPD definition if it is available.

Although Income Protection is fraught with its own challenges around underwriting, recognition of need and uncertainty over claim payments, any planning for future protection products has to recognize clients’ needs.

Key priorities for successful sales In summary, in order for a CI product to meet client need and thus to hold a strong position in the life protection market, the following criteria need to be met: • Products must be comprehensible and transparent. Coverage must be relevant to the everyday lives of people and should reassure them that their key lifestyle priorities have been addressed.

• Claims handling must be scrupulously fair. The introduction of independent claims arbitration to solve contentious claims disputes may well become more common.

• The underwriting process needs to be intelligently speeded-up to ensure that it is as user-friendly, fair and appropriate as possible. Looking at new tele-interviewing models (described in the following chapter) is one option for this.

• Its initial success in the U.K. shows just how well this product concept met a recognized need in society across all income levels and social classes. Its failure to fully adapt to the challenges that have confronted it has reduced that success.

To be successful, the CI product must be designed to be accessible to more than just the wealthiest parts of society, and that message and its effectiveness must be powerfully and effectively communicated.

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Underwriting

As CI cover is very different from life cover the underwriting approach also needs to be different. Although the basic underwriting processes are similar and the sources of medical and related underwriting information are much the same, underwriters must be aware of the distinctions between the two types of cover and adjust the way in which they approach each risk evaluation.

This chapter discusses underwriting aspects, including how to mitigate the risk of nondisclosure, required risk information and the successes of tele-interviewing.

Overview A thorough knowledge of the product is essential: what is covered – the basic scope and the precise definition of each insured event – and what is excluded. For example, if total and permanent disability (TPD) is included, what definition is used?

Above all, underwriters need to remember that life and CI insurance risks can be very different. This difference is principally driven by the fact that CI insurance pays on diagnosis. A diagnosis of a critical illness does not mean that death from the same illness will occur shortly afterwards; diagnosis may pre-date death by a considerable period and may not even prove to be the cause of death.

The most frequent causes of CI claims are cancer, heart attack and other cardiovascular (CV) diseases. The screening protocols available to insurers tend to be reasonably good at detecting or predicting CV risks, but are less effective in addressing malignancy (which is multi-factorial in etiology) and other CI risks. However, lifestyle habits such as smoking and alcohol intake, together with family history, can also be significant risk factors.

Accident risk also cannot be ignored. It is significant in respect of a number of insured events such as coma, blindness and even TPD. Underwriters must therefore bear in mind the impact of occupation, hazardous pursuits and residency.

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Anti-selection Underwriters also need to be mindful of the potential for anti-selection, as mentioned in earlier chapters. There is plenty of evidence that some individuals, aware of the possibility, or even the certainty, of a diagnosis through symptoms, tests or investigations, may withhold information or make their application for CI insurance before receiving an official diagnosis of a critical illness.

This risk arises in life covers too, but in CI insurance there are two crucial differences that increase this potential: • The insured, as opposed to his or her dependants, receives the benefit of the policy proceeds.

• The policy pays out before a death benefit, much earlier in some cases. The temptation to select against the insurer is therefore greater. For example, in Asia there has been a relatively high incidence of “early claims” from cancer of the breast, cervix and thyroid, raising strong suspicions of anti-selection.

Given the different nature of the insured risk, a case can be made for evaluating CI insurance using significantly different risk information compared to life. However, for various reasons, largely convenience, there is a tendency to underwrite using the same basic data, albeit with a slightly modified application form.

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Non-disclosure Non-disclosure is one of the main reasons for declined CI claims and is a major issue for the life insurance industry. Statistics on true levels of non-disclosure are hard to obtain, but in the U.K., where up to 20% of CI claims have been declined, half are thought to be due to non-disclosure.

This situation has been damaging to companies’ reputations, both individually and collectively in the market, partly because much non-disclosure is innocent (rather than a deliberate intention to withhold information from the insurer). Examples of innocent non-disclosure by applicants include a lack of understanding when completing the application form, poor judgment as to what is relevant or an unawareness of the condition that they are being questioned about. The presence of an intermediary may influence the extent and quality of the information given.

The most frequent form of intentional nondisclosure concerns smoker status. Routine cotinine testing would avoid this problem, but tends to be resisted in markets where laboratory testing is the exception rather than the norm; the U.K. and Ireland are prime examples of such markets.

In the U.S. the use of prescription databases in underwriting is growing. Underwriters are able to check that medication taken is consistent with the conditions disclosed and to judge the severity of medical conditions by the duration and dosage of treatment required. A further benefit is the ability to check that medication prescribed has been taken according to the physician’s instructions.

This facility is unique to the U.S. but very useful in the context of CI insurance.

The application form The traditional application form is a reasonable starting point for the assessment of the CI risk, but questions on the following need to be added for CI cover:

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• Detailed questions pertaining to CV diseases and their associated risk factors.

• Risk factors pre-disposing to other covered conditions, for example: – hypertension (CV diseases) – intestinal polyps (colorectal cancer) – eye trouble (blindness) – ear trouble (deafness) – valvular heart disease (open heart surgery) – genito-urinary trouble (kidney failure).

• Wherever possible, specific mention of defined insured CI conditions, such as multiple sclerosis, cancer and Alzheimer’s disease.

• Symptoms that may betray the presence of a covered condition, maybe as yet undiagnosed, such as tingling, numbness (multiple sclerosis), lumps or swellings (cancer), chest pain or breathlessness (coronary heart disease).

• Questions about routine screening, for example mammograms and cervical smears for women, and prostate-specific antigen (PSA) testing for men.

• Detailed coverage of family history, which can be a powerful predictor of risk in CV disease, cancer and multiple sclerosis, and which assumes special significance in directly inherited conditions such as polycystic kidney disease and familial polyposis coli.

• Investigations, particularly those with results outstanding; these may signify symptoms of covered CI conditions that may not yet have a firm diagnosis attached, or even diagnoses that have not yet been disclosed, even partly, to the applicant.

The design of the form is crucial; questions need to be worded clearly using everyday language.

Prominent warnings should be given about the consequences of non-disclosure and the applicant’s responsibility to carefully check what an intermediary has written on his/her behalf and any ongoing duty of disclosure until issue of the policy.

Many problems of the traditional application form are avoided with tele-interviewing, which we discuss below.

Other risk information Routine medical evidence is broadly the same as for life policies, although the requirements for CI cover are more stringent, requiring more information for a given sum assured.

In many markets, blood test requirements are infrequent, especially for younger lives. The introduction of more routine blood testing at lower sums assured could allow better risk selection for the insurer. For instance, CV disease risk can be more easily identified via the following indicators: accurate body mass index (BMI), blood pressure readings, blood sugar, blood cholesterol and smoker status via cotinine testing.

Other potentially useful tests include liver and renal functions with eGFR, hepatitis serology, especially in Asian markets where chronic liver disease is prevalent, tests for illegal drug use, urinalysis screens including microalbuminuria and electrocardiogram tracings.

Effective screenings for cancer risks are either impractical or rare, although a PSA test may be useful in older men.

In certain markets such as the U.S., the requirement for applicants to undergo testing at low levels of cover is widely accepted due to non-contestability laws. Conversely, in the U.K. and Ireland, the pressure to accept an application immediately makes testing unpopular with intermediaries and would call for stronger cooperation between insurers in the market.

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In fact, obtaining additional information need not involve nurses, phlebotomists or laboratory testing delays. Pharmacy testing trials are taking place in some markets; the applicant simply visits his/her local pharmacy for a quick check-up, particularly for the following: • blood glucose or HbA1c levels • oral fluid screening for cotinine • cholesterol estimation via skin test.

In the longer term, testing via oral fluid is easier and more convenient than testing blood or urine and holds a great deal of promise for routine screening.

Tele-interviewing Tele-interviewing is a process for risk information gathering that is growing in popularity in certain markets, particularly in the U.S., the U.K. and South Africa. It involves trained staff interviewing applicants over the phone to collect risk-related information, either in addition to or in lieu of the usual application form or as a substitute to a physician’s report. Given the requirement of quality, detailed risk information required for underwriting and the high risks of non-disclosure and antiselection, tele-interviewing is a highly effective way to collect risk information from applicants because: • Tele-interviewing segregates the sales and risk selection functions.

• The interviewer’s role is to help applicants to disclose information. If done well, it puts the applicant at ease, encouraging disclosure. The best tele-interviewing processes consistently yield more and better information than paper applications.

• It focuses questioning where necessary.

• Telephone calls are recorded providing a clear audit trail.

• It can avoid the need for further information, thus improving turnaround times and reducing costs.

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Risk evaluation In CI underwriting, the following risk factors need to be considered: • Hyperlipidaemia, hypertension and overweight predispose to heart attack, stroke and other CV diseases.

• Smoking is associated with an increased risk of CV disease and cancer. Smoker-specific premium rates largely take account of these risks, but high levels of tobacco consumption call for an additional rating or maybe even declinature.

• Alcohol: while modest alcohol consumption has been shown to be protective against CV disease, a high intake is associated with an increased incidence of stroke, cancer and other causes of morbidity. The accident risk is also increased.

• Diabetes represents an exceptionally severe risk for CI insurance: its classic complications are CV (heart attack and stroke as CI events, also loss of limb in respect of peripheral vascular/neurological complications), renal (kidney failure) and ocular (blindness arising from retinopathy) in nature. Normally CI cover is declined for diabetics.

• Family history often assumes more significance in CI cover than in life cover, especially if it involves CV disease, cancers or multiple sclerosis, for which there is a strong inherited tendency.

For certain cancers there is a well recognized or even clear genetic link, for example ovarian cancer, breast cancer (BRCA 1 and 2 gene mutations) and two types of inherited colorectal cancer.

• In some Asian markets, chronic hepatitis is very important because of the predisposition to hepatoma and liver failure (major organ transplantation).

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The combination of two or more risk factors usually has an impact significantly greater than implied by the simple addition of the individual ratings. Such combinations represent a high risk for CI insurance.

Furthermore, even though two or more risk factors may not individually result in a rating, their combined presence may nevertheless constitute an extra risk which needs to be rated.

Symptoms Underwriters must also be vigilant to signs and symptoms that could indicate the presence of a covered illness or significant risk factor, even though they appear not to have been significant to the applicant. Examples include: • Neurological symptoms such as numbness, tingling and disturbances of vision that may be indicative of multiple sclerosis. Although there are well-recognized diagnostic criteria for this disease, a confirmed diagnosis is often very hard to make, and physicians may defer from labeling the signs as due to demyelination until the onset of more serious symptoms; this is often out of consideration to the patient.

• Lumps and lesions that are said to be benign; where possible get confirmation from the attending physician.

• Unexplained investigations may give clues to undisclosed symptoms or to a family history of a covered CI condition.

• Incomplete investigations: even where symptoms are thought to be due to something insignificant for CI cover, it may be preferable to wait until investigations are complete. For example, a uterine mass may be provisionally diagnosed as a fibroid, but a CI insurance application should be deferred until the histology is confirmed.

• Individuals with medical knowledge may also represent an anti-selection risk due to their understanding of the significance of the early signs and symptoms of illnesses.

Pre-existing critical illnesses Usually, if an applicant has a history of an insured CI condition, the CI risk will be unacceptable. Most covered CI conditions are chronic or progressive in nature, or associated with serious multi-system diseases, representing a high risk for life cover, let alone for CI insurance. However, this is not invariably the case. For example, an otherwise healthy person with an eye-specific disease that has resulted in blindness can be safely insured for other CI conditions.

Another exception may be a history of cancer.

Provided the malignancy appears to have been successfully treated, evidenced by no recurrence over an appropriate period of time, cases may be acceptable with cancer included in the CI cover.

However, cases need to be selected carefully and restricted to malignancies which were localized and which demonstrably have a good prognosis, such as early seminoma and Hodgkin’s lymphoma, both of which are extremely responsive to radiotherapy. Cancers that have a long-tail risk, even in relatively localized diseases, such as breast cancer, should be avoided. Cases that have been treated aggressively with combination chemotherapy should also be avoided, as there is a significant risk of secondary tumors.

“Key man” CI cover is used to protect a company from the loss of a person who is vital to the business. In the event of a claim, the lump sum should be used to replace the key individual either temporarily or permanently. The term of the contract should be short, generally up to 10 years. Normally a maximum of 10 times the insured’s income is used to calculate the sum assured, but a multiple of net profits can also be considered. The risk of anti-selection can be considered to be lower with this type of cover because the insured is not the beneficiary of the policy.

Partnership CI cover is used to cover the owners of a business so that in the event of one of them suffering a critical illness, which may render them unable to continue working, the remaining owners are able to buy that person’s share of the business.

Normally the sum assured is based on the valuation of the company; ideally this should be obtained from an independent source. The sum assured should be a percentage of the company valuation reflected by the shares owned by the applicant.

A buy-sell agreement should be in place with all other insured partners.

Financial underwriting CI insurance is a living benefit with an increased risk of anti-selection. It is therefore general practice to restrict sums assured to lower levels than those for life cover.

Personal CI cover is normally calculated as a multiple of annual income, usually up to a maximum of 10 times the amount. The multiple used depends on the applicant’s age and number of dependents, with outstanding mortgage loans sometimes being taken into account. Loan-related CI cover is increasing in popularity; many intermediaries in fact include it in their “needs analysis“ and subsequent recommendations. Some loan agreements even stipulate CI cover as a required security.

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Claims

In comparison to life cover, CI cover requires the claims assessor to have a higher level of medical knowledge and understanding of the CI product, including the conditions covered and exclusions applied. This is because CI insurance relies on precisely defined medical criteria for each covered event, all of which are decided following a detailed investigation of the level of coverage that can be supported by the pricing.

Due to the complexity of the medical evidence, the room for interpretation and the difficulties of establishing whether criteria have actually been met for a valid CI claim, the claims assessor must frequently seek the help of their chief medical officer or expert resources provided by their reinsurer. In rare instances, second opinions from specialists in the field may be required either to interpret the medical evidence or to carry out an independent medical examination of the claimant.

The poor publicity surrounding declined claims means that claim assessors also have a responsibility to consider whether their decisions present a reputational risk to their company brand. If a significant risk is identified, claim assessors may need to seek senior management input to their technical decision.

In the following pages we review important CI claims handling considerations.

Procedure On receipt of a CI claim notification from the insured, the claims assessor must request all the medical details from the treating physician(s) to assess the validity of the claim. Normally this is done using specifically designed questionnaires for each of the covered CI conditions to ensure that all relevant information is received. To save time and expense, it is common practice to request copies of the original reports and test results alongside the questionnaire when first writing to the treating physician, however, these will not always be supplied. Where there is any doubt about the information provided in the questionnaire, the claims assessor should insist on copies of the original reports and test results.

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All claims should be handled in a timely manner and with payment made as soon as the claim is admitted. If delays are experienced for any reason, the claimant should be kept fully informed as to the status of their claim. It is also important to be sensitive to the fact that the claimant has suffered a serious medical crisis whether or not their claim is found to be valid after assessment. There are conditions that will not satisfy the strict criteria in the CI policy conditions, but which are entirely genuine and significant for the sufferer, such as a transient ischaemic attack.

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Early claims Due to the inherent risk of anti-selection, as with any living benefit, the claims assessor must ensure that a thorough assessment is made of all early claims, normally those made within the first year of policy inception. In many markets, a three month waiting period is applied to certain conditions (including cancer and heart disease) following inception to try to avoid anti-selection. Early claims could become even more problematical to the insurance industry due to the development of home testing kits, or where “walk-in” clinics mean that applicants can be tested for a wide variety of conditions, without any traceable records of this being kept.

Declined claims CI insurance has come under intense scrutiny in recent years due to the high number of declined claims and the knock-on effect that this has had on the industry’s reputation and, as is believed, on sales.

The U.K. seems to have a greater issue with declined claims and resulting media attention than other markets. In the past, figures for the U.K. showed that approximately one in five of all CI claims were declined, mainly due to non-disclosure at the application stage or to criteria for the condition not being met. The inclusion of TPD within the CI product is thought to be one of a number of reasons for this, as it is estimated that around 50% of TPD claims to date have been declined.

Other contributing factors include the fact that the U.K. does not have contestability clauses, and that it allowed claims with unrelated non-disclosure to be declined. For example, an insured who failed to disclose gestational diabetes, recovered and then made a claim for breast cancer several years later, could have previously had their claim declined.

This is no longer the case in the U.K.

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Another reason for the high number of declined claims in the U.K. is that all patient records are stored centrally by the National Health Service (NHS). In the past it was easy for an insurer to obtain detailed medical histories, however from 2008, ABI guidelines limit this ability.

Aware of the high declinature figures, negative media attention and based on their own research, the U.K. insurance industry has taken several steps to address these issues and restore public confidence in the CI product, including: • standardizing the wording of several commonly covered CI conditions and exclusions (see the Critical Illness Conditions chapter) • publishing guidelines on the treatment of nondisclosure with detailed examples of how to assess various types of non-disclosure • highlighting the need for improved training of sales intermediaries following “mystery shopping” experiences • encouraging clearer, simpler documentation that is easy for the insured to understand, emphasizing the importance of full medical disclosure right through to policy inception • ensuring that experienced claims assessors are able to feed their experiences into the design of policy terms and supporting literature, application forms and tele-interviewing scripts.

This allows lessons to be learned from real cases where there has been ambiguity, loopholes or misunderstanding by customers.

If followed, these guidelines should ensure that the intermediary and applicant understand the importance of full disclosure, the scope of the coverage being bought and that the company is treating the customer fairly and within the strict letter of the law. The U.K. Financial Ombudsman Service (FOS) will consider whether these guidelines have been followed when ruling on any disputed claims referred to them.

A few individual companies have gone even further by, for example, offering existing customers the chance to review their original disclosures or removing the requirement to notify the company of any health changes between application and commencement of the policy.

Along with clearer wordings and guidance, the advent of tele-interviewing, as discussed in the Underwriting chapter, has also proven to be very successful in the reduction of non-disclosure.

Service innovation As well as product innovation or enhancement, some CI insurance providers are looking towards claims service innovation as a market differentiator.

The U.K. is starting to see the use of tele-claims processes as companies realize the potential and success of tele-interviewing. By using specially qualified interviewers, companies are able to assess claims in a more timely and cost efficient manner by asking all the necessary questions upfront.

By establishing a rapport with the claimant, the interview provides an overall more pleasant experience for the claimant at a time when they are most vulnerable, while also obtaining greater disclosure.

Another service innovation is to offer the claimant individual, specialist medical advice on their condition and the treatment options available to them, access to nurse-led helplines for emotional and practical support and/or access to rehabilitation resources.

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Rationale for Reinsurance

Some of the key distinguishing features of CI insurance compared to life insurance are the much greater level of uncertainty surrounding expected claims, higher claims volatility and increased potential for adverse trends in experience created by medical advances, changing social behaviors and a rapidly evolving market. Reinsurance enables insurers to manage these risks through risk transfer, and also adds value in terms of risk analysis support as well as capital provision and management.

Risk transfer The essence of any reinsurance arrangement is transfer of risk from the insurer’s book to the reinsurer. The principle concern of many insurers with regards to CI risk is that the expected level of claims is not well defined, particularly for companies lacking their own experience data and for markets where little published data is available.

The other major dimension to CI risk uncertainty is the potential for adverse future trends. While mortality rates have generally been improving, critical illness incidence rates have deteriorated.

Improving diagnostic techniques mean that many diseases are being picked up earlier, enabling more prompt treatment with better prospects of survival. This is good news for the population at large, but makes it challenging to use existing data to predict future trends in incidence rates. The resulting uncertainty is of particular concern when the CI insurance premiums are guaranteed. While a well capitalized, internationally-diversified reinsurer is probably better equipped to manage and bear these sorts of risks compared to a domestic insurer, all reinsurers will still need to make charges for the inherent uncertainty. Many of these risks are good examples of the oftenquoted “expanding funnel of doubt”. The guarantee loadings may, therefore, be a substantial proportion of a long-term, guaranteed CI reinsurance premium rate.

Access to capital Life insurers require free capital to write new longterm insurance products in order to cover the initial expenses, commissions, the cost of establishing statutory reserves and the solvency capital. “New business strain” arises when such costs exceed the first year’s corresponding premium income.

Quota share reinsurance is a highly effective means with which to reduce the level of new business strain, also for CI insurance.

Efficient capital management Reinsurance has become an effective tool for steering the financial progress of an insurance company as a whole. Where regulatory solvency requirements allow for solvency margin credit to be taken for business reinsured, there may be an advantage for the insurer to reinsure up to the extent of the permissible offset. The benefit depends on the costs of the reinsurance compared to the opportunity cost of the solvency capital that would otherwise have been committed.

In some markets, a situation of regulatory arbitrage may also exist, whereby reinsurers are treated more favorably than insurers as far as regulatory capital requirements are concerned, for a variety of reasons.

While probably the most important driver, reinsurance is not only purchased for the risk transfer involved.

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Technical support An independent, experienced discussion partner can bring significant benefit, in particular for smaller or relatively inexperienced CI insurance providers.

The provision of expert knowledge and information, such as data for CI pricing, advice on product design and underwriting assistance, may be a key element of the value proposition offered by the reinsurer. International reinsurers often have considerable experience in CI business, acquired in many parts of the world, and have the resources and economies of scale to justify investment in research into product design and risk assessment.

Capacity The ability of an insurer with a relatively small portfolio, or low capitalization, to compete with large and established insurers is severely limited if it is not able to match the benefit structure in respect of maximum sums assured. By reinsuring risks above a specified retention, smaller operations can make use of reinsurance capacity to help them to compete with larger insurers.

Focus on core competencies Many insurers excel as specialist distributors and asset managers; they may not necessarily consider morbidity risk management as a core competency.

By “outsourcing” morbidity risk to the reinsurer, an insurer can focus on achieving improvements in operational efficiency.

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Specific reinsurance considerations Nowadays, most CI business is reinsured via a quota-share risk premium reinsurance arrangement. In this structure, all claims are shared with the reinsurer, allowing the insurer to gain experience without over-exposing itself, especially to systematic or trend risks. Such arrangements can also be effective at reducing the capital required to write the business. In order that all potential benefits can be realized, the following reinsurance considerations should be made: Proximity to operational process A fundamental distinguishing feature of CI risk (unlike mortality) is the scope for subjectivity of claims adjudication. The experience of a CI portfolio may, therefore, be relatively more influenced by the claims management skills of the insurer’s claims department, although other elements of the overall risk management regime (robust product design and CI definitions, sound underwriting practices and timely application of the actuarial control cycle) are clearly also important. Compared to life insurance, a reinsurer will therefore tend to take a closer look at an insurer’s CI product design, new business processes and claims handling practice.

Alignment of financial interest A reinsurer will also generally wish to ensure that any reinsurance arrangement preserves an alignment of financial interest between the insurer and reinsurer. Financial alignment is usually achieved by the reinsurer specifying a minimum participation percentage by the insurer, which maintains the incentive to actively manage claims.

Alignment with the mortality risks Another aspect relating to the reinsurance of accelerated CI risk is that a reinsurer will generally insist on reinsuring the associated mortality risk on the same basis. The reason for this is essentially a practical one. Should death occur shortly after a critical illness event is believed to have occurred, there may be insufficient opportunity to acquire the medical evidence that proves whether or not the critical illness claim definition was indeed satisfied.

It is clear that the successful management of CI risk calls not just for reinsurance placement, but for a transparent, long-term partnership between insurer and reinsurer involving the regular exchange of data, knowledge and expertise.

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The Future of Critical Illness Insurance

CI insurance is an important part of protection coverage that has brought financial relief to too many seriously ill people to be dismissed as a product that is past its sell-by date.

One of the main selling points of CI insurance in the beginning was its simplicity – a lump sum payout on diagnosis of a listed CI condition. The CI product in the U.K. and many other markets has however evolved into something quite complex, fraught with potential mis-selling by intermediaries and misunderstanding by policyholders. Our opinion is that this simplicity needs to be restored and that there is therefore a market for limited condition, such as “cancer only”, CI products.

One of the current restrictions of CI insurance is the inability to alter the terms and conditions once the policy has been sold. Under Private Medical Insurance (PMI), the insurer can change the benefits covered and premium each year. The policyholder is assured of having a product which is regularly updated to cover relevant illnesses and need not pay large guarantee loadings as the policy is annually reviewable. People expect their PMI premiums and cover terms to move around each year and are reasonably happy with this – the PMI policy will by and large cover their needs at each future renewal, without having to predict now what the conditions covered or premium will look like in 10 or 20 years time. A similar structure could be devised for CI insurance in some markets.

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Furthermore, as has been achieved in the Australian market, markets which offer both Income Protection (IP) and CI insurance could also offer a combined product providing the virtues of CI lump sum and the IP disability annuity as one, thus catering for the real needs which each separately addresses.

CI insurance has probably taken away from IP sales in the U.K. in recent years, but with the increased tightening of CI conditions, there are many declined CI claims that might have become accepted IP claims and vice versa. Putting both CI and IP into a “hybrid” contract has to be attractive and also to serve the genuine customer need for a “living product”.

There are clear ways of transforming CI insurance into a more attractive, accessible and dynamic product, and one that is aligned to the fast pace of change within the medical sector.

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