Imagine we have a blank sheet of paper in front of us and that we are designing the critical illness...
Imagine we have a blank sheet of paper in front of us and that we are designing the critical illness product to take us into the new millennium. What special information will we need to consider, and what features and conditions might we need to incorporate.
The differences in the way that disease will be screened for and diagnosed in the future will be of enormous interest to the insurance industry as a whole. The effect and impact of these changes will need to be reflected in product design and, potentially, product pricing. For example, the UK Government has recently considered the possibility of introducing screening tests for prostate cancer, although the decision to do so has so far not been taken.
However, when screening was introduced in New York State in the US, there was a 40% increase in the incidence of prostate cancer. Of course, in reality, the incidence had not changed but diagnosis was being made earlier, often in men who had no symptoms. Any change that would radically alter the statistics such as this is worthy of our attention.
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Treatment and prevention.
The change in treatment patterns and opportunities for disease prevention should also be monitored and evaluated. According to the British Heart Foundation, the number of angioplasties currently carried out is 14,000 per year and this number is increasing by 13% annually.
However, not all of these would qualify for payment under critical illness cover. Furthermore, the absolute number of heart attacks is decreasing as preventative surgery becomes more normal, so there will be some crossover between the two conditions. In fact, if current guidelines on the treatment of raised cholesterol were universally adopted, treatment would take place even earlier in the disease cycle, thereby preventing in some cases both the need for surgery and the heart attack itself.
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Windfall benefits.
The definitions that the insurance industry has worked so hard to agree on should still be used, and any future amendments to these wordings should be capable of inclusion in any new product. These definitions provide for the adviser and policyholder alike the necessary ease of comparison, clarity of information and the management of expectation.
The windfall nature of some of the benefits also needs to be addressed so that the product is seen to primarily cover the diseases and events that have a significant impact on lifestyle. Windfall gains affect behaviour in ways that we cannot predict. In some cases it may even provide an incentive to allow health to deteriorate, therefore encouraging different treatment decisions to those anticipated when pricing.
In some circumstances only a partial or fixed proportion of the overall benefit will be paid as residual cover. Some cover will remain on both accelerated and standalone critical illness contracts, allowing for residual payments to be made on the occurrence of a second event whether that is death or a further critical illness.
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Product features.
The plan design should ensure that people have no encouragement to wait until later in a disease process to claim benefits, for example with heart problems.
The product should remain open for a second event claim whenever a partial benefit has been paid.
In an ideal world the policy that we would sell to each individual would only provide cover for the disease which we know is going to effect them during the lifetime of their policy. Product design would be simple as we could offer a bespoke product to each applicant. However, we do not have this insight whatever the public perception might be of the potential use of genetic information so we have to do the best that we can.
We have therefore to look at diseases that have a clear impact on lifestyle and estimate the duration of this effect, thereby allowing us to structure the benefit amount to match peoples' needs. Clearly this need may be very different for each disease.
Tiered benefits merely mean that a different level of benefit is payable for different conditions, and for different levels of disease or disability within individual conditions. This has been around for some time in the UK in a limited form, as some products pay only 25% of the sum assured for angioplasty.
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Enhanced payments.
For plans that pay a single amount of benefit, it is hard to equate the financial loss and the seriousness of the condition suffered, when comparing angioplasty, where a return to work can be made several weeks later, to the disabling effects of, say, kidney failure.
The advantage of tiered benefits is that this represents enhanced payments for more serious diseases, and payment is tailored to match the disability likely to be suffered in each condition covered.
However, some diseases that are extremely serious will always have the full amount of benefit paid, such as motor neurone disease or organ transplant.
Where benefits are paid out at different levels they represent fixed amounts of the sum insured, which are Level 1 (25%), Level 2 (50%), Level 3 (75%) and Level 4 (100.
Since a partial payment is possible from the policy, it means the balance of the sum assured remains in force for subsequent claims either from a recurrence of the same condition or from a different cause.
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Benefit application.
If we focus on one disease process and use this as a template for how tiered benefits can be applied, we hope to highlight that this is indeed a natural evolution borne out of our experience. We have chosen to look at cancer. This is particularly relevant as this particular disease represents a substantial number of the claims paid to date.
The definition of cancer would be the standard ABI model wording, but the level of benefit payable will depend on the 'staging' of the cancer in other words, the extent of the spread of the tumour. It would not be practical for the contract to contain the exact definitions of all the different cancer types, instead reference is made to the different stages as defined within the standard classification (see table.
For some people their fear when they have had cancer at a less severe grade would be to get it back again the same is no doubt true of all the significant disease processes normally covered under critical illness policies.
For some other conditions covered, such as loss of sight where the definition is very robust in other words permanent loss of all sight, we should be able to make partial payments depending on the extent of sight lost. Reduced benefits could be made for total loss of sight in one eye or for severe visual impairment in both eyes.
If we look closely at each of the elements mentioned initially it is clear that they can be covered to some degree within a tiered benefit product. This product will be able to reflect the changes in diagnosis, screening, treatment and prevention of disease by the adjustment of benefit payment levels.
The definitions themselves would be fluid and capable of change in line with experience and industry recommendations. The windfall nature of some benefits has been addressed along with the possibility of offering at least some level of benefit in those conditions covered where the definition is particularly robust. Furthermore, there is the potential for some residual cover to remain in the event of a second or subsequent claim.
The critical illness products of today are not of a static nature. Definitions even those that have agreed model wordings will be subject to change and further refinement. This product will pay enhanced benefits in line with the severity of the condition covered and the likely duration of symptoms. This should stabilise claims for insurance companies and, in a perfect market, keep costs lower for the consumer.
Julie Hopkins is chief underwriter and Debbie Whatthey is deputy actuary at Hannover Life Re.
