Critical Illness Global Market Issues. IAA Health Section Critical Illness Topic Team Presented by Sue Elliott (chair) and Neil Hilary 1 June 2006

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2 Critical Illness Global Market Issues IAA Health Section Critical Illness Topic Team Presented by Sue Elliott (chair) and Neil Hilary 1 June 2006

3 Introduction Emerging themes/issues: Standardized definitions Guaranteed vs reviewable premium rates External influences Claim delays Capital and solvency issues Product innovation Discussion SUMMARY

4 Introduction

5 Purpose of Topic Teams Create an international community of actuaries (and others) who seek to gather, discuss and disseminate information to our members (not limited to actuaries) Communications tools Online Journal, website, periodic colliquia and meetings

6 Critical Illness Topic Team Members Sue Elliott United Kingdom (chair) Andres Webersinke Asia Pacific Richard Houde Canada Avi Bar Or Israel Jaime Jean Mexico Peter Davies New Zealand Audrey Kudryavtsev Russia Peter Temple South Africa Darrell Spell United States Hank George* United States (underwriter) * resigned, but provided some initial input Source: SoA CI Seminar, September 2005, Baltimore

7 Critical Illness Emerging themes/issues

8 Critical Illness Standardized definitions

9 Standardized definitions Asia Pacific standardization in some markets such as Taiwan, Singapore and Malaysia (stricter than UK) Australia u/k Canada under debate Ireland tend to follow the ABI South Africa differing severity level definitions United Kingdom ABI model wordings (just updated) United States not at present

10 Guaranteed vs reviewable premiums

11 Guaranteed vs reviewable - stakeholders Policyholder: - likes certainty Intermediary: - fixed premiums are easy to explain - distrust of insurers and reviewable premiums Insurer: - face market demand and strong competition - history of problems with reviewable premiums (ie implicit guarantees) - pass guarantee risk to reinsurer Reinsurer: - client demand for premium guarantees - strong competition & market capacity - can diversify the risk across products, companies & territories Regulator: - concerned about risk assessment and adequate capital

12 Reviewable critical illness Advantages: Generally lower premiums (affordability) Offers consumer choice Changes in an individual's medical condition do not affect their premium when reviewed For innovative product design reviewable may be the only option that insurers/reinsurers will support Disadvantages: How reviewable is reviewable (ie implicit guarantees)? Commercial pressures Policyholder reasonable expectations (PRE) Treating Customers Fairly (TCF) Review clauses lack of clarity & transparency (ABI consultation on reviewable premiums )

13 Guaranteed critical illness Advantages: Peace of mind and certainty (that rates won't change) Easy to explain at point of sale Disadvantages: Reducing reinsurance capacity & support Potential impact of medical advances Robustness of definitions against medical advances Reserving & capital implications

14 Issues to consider Appropriate allowance in pricing & reserving for guarantees to policyholders: - extent of guarantee full, partial, none? - are current guarantee loadings enough? - will appropriate guarantee loadings make the coverage unaffordable? Deterioration in underlying morbidity experience Definitions are virtually guaranteed Allowance for potential impact of medical advances (for all major conditions) Allowance for changing consumer attitudes & expectations: - PRE - legal challenges - increasing consumer awareness

15 Assessment of risk level and volatility Key sources of pricing error: - credibility of data - appropriateness of data - effect of trends - effect of shocks Robustness of definitions: - against medical advances - against social change

16 Methodology Theory - increase loading for longer outstanding guarantee period Society of Actuaries (Ireland) CI Guarantees Working Party - margin = x% + y% pa - where x = 35 to 50% - where y = 1 to 3% pa Practical - use single z% loading across whole portfolio

17 Typical guarantee loadings Company Product type Flat margin (x% ) Additional allowance for future trends (y% ) 1 Stand alone 10% 1.5% pa 2 Acclerated 20% 1% pa 2 Stand alone 30% 2% pa 3 Acclerated 40% 2% pa 4 Stand alone 45% rates x (1.02)^10 5 Both 35% 1.5% pa 6 Stand alone 50% none 7 Acclerated 40% none 8 Acclerated 30%.75% pa 8 Stand alone 40% 1% pa Source: UK IoA Appointed Actuary Survey

18 Typical valuation margins Critical Illness Income Protection Expected Conventional Conventional Expected Conventional Conventional Margin - guaranteed - reviewable Unit linked Margin - guaranteed - reviewable Unit linked 0 to 14% to 10% 2 1 most 15 to 24% to 20% to 34% to 30% % % Average 35% 22% 23% Average (est) 20% 15% 10% Trend? Trend? Source: UK IoA Appointed Actuary Survey

19 Summary Reviewable vs guaranteed CI advantages & disadvantages of both Reviewable (review clause) impact of ABI consultation on reviewable premiums? Guaranteed (medical advances & legal challenges) impact of ABI CI Statement of Best Practice consultation? Either option price and reserve appropriately for the risk covered

20 Critical Illness External influences

21 External influences Potential financial implications of medical advances (eg improved diagnostic techniques) Robustness of definitions against legal challenges Increase in consumer awareness Changing stance of the Obmudsman/external claims adjudicator

22 Medical advances/improved diagnostic techniques Cancer greater prevalence of screening to aid in early detection of cancer (eg breast & prostate) Heart attack impact of troponins Multiple sclerosis impact of new diagnostic techniques (eg interferon beta & MRI scans)

23 Robustness of definitions against legal challenges Medical definition vs insurance definition Impact of changing view of Financial Services Ombudsman Scheme: Philosophy: - they operate on a fair & reasonable basis - they put a lot of emphasis on what the person thought they were buying and their general knowledge of the contract - it does not suffice to simply refer to the key features document Current concerns: - appears that cases that once would have been rejected by the FOS are now being accepted - 40% of cases are being decided in favour of the consumer - not reflected in the original pricing ABI CI Statement of Best Practice recent consultation (eg clarity, futureproofing)

24 Changing consumer attitudes and expectations Policyholder reasonable expectations (PRE) Increased financial understanding Increased awareness about their rights Consumer activity in uncertain economic times Reduction in house sales will directly impact on mortgage related CI Increasing non-disclosure

25 Reinsurance drivers Reinsurers have a major impact on the protection market Availability of reinsurance withdrew support for guaranteed CI but now re-entered Capital scarcity Influence of the rating agencies Risk management Parental constraints Ceding offices concerned about the financial stability of their reinsurer and counterparty risk

26 Critical Illness Claim delays

27 Claim delays Institute of actuaries experience to date Offices were asked to supply four dates: - date of diagnosis - date of notification - date of admission - date of settlement Various combinations were received Admissions generally very close to settlement Large delays between diagnosis and notification and between notification and settlement Introduced an IBNS factor (ie incurred but not settled) around 15%

28 Critical Illness Capital and solvency issues

29 Capital UK current issues Individual capital assessment ICA Definition a self-assessment of capital requirements: - firms required to identify risk - firms required to undertake stress and scenario tests to gain a comprehensive view of the risks being run by the firm in extreme, but foreseeable circumstances - such that no significant risk that liabilities cannot be met as the fall due

30 Capital UK current issues (2) ICA initial feedback: - ICA calculations require a lot of work and preparation - ICA's may offer an opportunity for term books, but may lead to capital increases for other protection books (especially guaranteed CI) - a worsening of reinsurance capacity/terms can exacerbate the squeeze on capital - a holistic and thorough approach to the ICA brings many risk management benefits - further work will be required to integrate the ICA fully

31 Solvency current issues Solvency I Purpose: - adoption of two Directives of life and non-life to reinforce safeguards to policyholders by strengthening the solvency margin requirement for the healthcare business written in the Class IV fund Business affected: - stand alone critical illness (CI) - accelerated CI (health component) - income protection (IP) - long-term care (LTC) Calculation: - 4% of reserves plus GI style calculation, which is the higher of solvency margin calculated on the premium basis and the claims basis - reduced to 1/3 if five necessary conditions are met guaranteed business does not meet all the conditions Solvency II: - a more wide-ranging review

32 Critical Illness Product innovation around the globe

33 Global CI product innovation Payout other than a lump sum (eg monthly to match mortgage payout) Benefits based on severity: - introduced in South Africa (typically 4 to 8 severity levels) - US partial payments (eg CABG, angioplasty, carcinoma insitu) Multiple payments: - partial payments - each condition is paid out once with an overall limit - fixed number of payments on each occurrence or recurrence of a condition Unbundled products: - South Africa basic to comprehensive design - US choice of cancer or heart (covering heart attack, stroke, bypass, angioplasty) Source: SoA CI Seminar, September 2005, Baltimore

34 Global CI product innovation (2) Waiver of premium Buy back option: - on accelerated policies only - reinstate sum assured following payment of a CI payment - very common in Australia Optional benefits: - rehabilitation expense reimbursement - overseas assistance benefit - children education benefit - assisting with choosing doctors and facilities Products targeted at certain groups: - juvenile products - newborn coverage - female CI products (popular in much of Asia) female diseases, pregnancy complications, congenital anomalies Source: SoA CI Seminar, September 2005, Baltimore

35 Global CI product innovation (3) Integrated products: - CI and medical insurance - medical reimbursement for costs exceeding lump sum - CI and disability insurance - reduced lump sum with income payable on continued disability Medical advances and reviewable definitions Source: SoA CI Seminar, September 2005, Baltimore

36 Discussion