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W W W . W A T S O N W Y A T T . C O M
UK Critical Illness MarketSue Elliott, Senior ConsultantWatson Wyatt LLP
IAAHS – Colloquium 200429 April 2004
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Agenda for today
l Introduction – the healthcare insurance risk
l Critical Illness in the UK:– UK market overview– Current drivers of morbidity experience– Experience trends– The future of the UK market
l Comparisons with other markets
l Questions & discussion
W W W . W A T S O N W Y A T T . C O M
Introduction – the healthcare insurance risk
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The healthcare insurance risk
Emerging trendsmust form thebasis of future
strategy
Consistent philosophyacross alldisciplines
Multi-disciplinaryapproach isfundamental
Multitude ofInternal & external
risk factors
Much more complexthan traditional
life risk
RISKS
Introduction
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The Control Cycle – today
Product Design
Pricing
Marketing/Sales
UnderwritingClaimsManagement
Valuation
Experience Monitoring
Introduction
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UK market overview
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UK market overview –individual business
Source: SRL&H Term & Health Watch 2003
627694
783 780
872
1168
0
200
400
600
800
1000
1200
1997 1998 1999 2000 2001 2002
New Polices ('000's) l One of the UK insurance industry’s success stories
l Fastest growing healthcare line in the UK
l Appeal:
– simplicity
– "perceived" need
– windfall element
l Currently profitable:
– robustness of definitions?
– potential impact of medical advances given that claims trigger is based on diagnosis
l Heavily reinsured
UK market overview
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UK market overview –group business
6.5
9.910.9
16.2
0
2
4
6
8
10
12
14
16
1999 2000 2001 2002
Premiums £million
l Strong growth, from a low base
l Role within flex / voluntary schemes responsible for growth
l Lives covered small relative to individual market
l Around 20,000 more lives covered in 2002, a slow down from 30,000 increase in 2001 despite premium growth. Total market 135,500 lives.
l Group critical illness remains a small market relative to other employee benefits.
Source: GE Frankona - GroupRisk survey
UK market overview
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UK market overview
l Strong demand for CI in the UK market
l Little reason to seek out radical new product designs
l Innovation has been limited to focusing on providing greater coverage of conditions & more contract flexibility
… however the industry is changing!
l 2003 started with several high profile announcements of significant increases to CI premiums (largely due to increased reinsurance terms)
UK market overview
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Association of British Insurers (ABI) CI Statement of Best Practice - aim
l Ensure that cover remains affordable
l Ensure that cover continues to meet customer needs
l "Appropriate minimum standard“
UK market overview
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ABI CI Statement of Best Practice -scope
l Key features
l Generic terms
l Model wordings for core conditions (7)
l Model wordings for additional conditions (13)
l Model exclusions
l Review process (every 3 years):– effective April 1999
– revised May 2002
UK market overview
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ABI CI Statement of Best Practice- May 2002 changes
l Cancer:– changed to ensure cover remains affordable– increased number of detected cases likely to result from the
"Government's Prostate Cancer Management Programme"
l Heart Attack:– changed to ensure cover remains affordable– ensure definition takes account of medical advances and the
claims criteria reflect current medical practice– increasing use of troponin tests to detect heart attack
UK market overview
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UK product design
l Accelerated (majority)
l Level benefits throughout
l No return of premium upon death
l Fully guaranteed premiums (majority)
l Waiting period – not applicable
l Survival period – 14 or 28 days for all conditions
l Core conditions – cancer, heart attack, stroke, CABG, kidney failure, MOT, MS
UK market overview
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UK industry working parties
l Association of British Insurers (ABI) – focus on definitions and model wordings
l Continuous Mortality/Morbidity Investigations (CMI) – focus on insured experience
l Institute of Actuaries (IoA) – focus on trends in population incidence for core CI conditions
l Investment & Life Assurance Group (ILAG) –focus on product evolution
UK market overview
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Current drivers of morbidity experience
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Current drivers of morbidity experience
DRIVERS
Long-termpremium guarantees
Increase in solvency requirements for CI
Changing consumerattitudes &
expectations
Robustness ofdefinitions againstlegal challenges
Potential impactof medical advances
Reducing reinsurancecapacity &
support
Current drivers of morbidity experience
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Current driver # 1 – reducing reinsurance capacity & support
l Withdrawal of capacity for guaranteed ratesl Knock-on impact on reviewable terms
– How reviewable is reviewable?– Commercial pressures– Policyholder reasonable expectations (PRE)
l The future reinsurance market– What will be the attitudes of the reinsurers going
forwards?– Will reinsurance terms be sustainable?– Will providers be forced to retain more?– Financial stability?– Counterparty risk?
Current drivers of morbidity experience
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The “traditional” reinsurance relationship
Current drivers of morbidity experience
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The “traditional” reinsurance relationship
Current drivers of morbidity experience
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Current driver # 2 – long-term premium guarantees
l 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?
l Deterioration in underlying morbidity experience
l Definitions are “virtually” guaranteed for current contractsl Allowance for potential impact of medical advances (for all major
conditions)
l Allowance for changing consumer attitudes & expectations– PRE– legal challenges– increasing consumer awareness
Current drivers of morbidity experience
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Current driver # 2 – long-term premium guarantees (continued)
l Policyholder– likes certainty
l Intermediary– fixed premiums are easy to explain– distrust of insurers and reviewable premiums
l Insurer– face market demand and strong competition– history of problems with reviewable premiums (ie implicit guarantees)– pass guarantee risk to reinsurer
l Reinsurer– client demand for premium guarantees– strong competition & market capacity– can diversify the risk across products, companies & territories
l Regulator– concerned about risk assessment and adequate capital
Current drivers of morbidity experience
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Current driver # 2 – long-term premium guarantees (continued)
l Assessment of risk level & volatility– Credibility of data– Appropriateness of data– Effect of trends– Effect of shocks
l Methodology– Theory – increase loading for longer guarantee period– Society of Actuaries (Ireland) CI Guarantees Working Party
l Margin = x% + y% pal Where x = 35 to 50%l Where y = 1 to 3% pa
– Practical – use single z% loading across whole portfolio
Current drivers of morbidity experience
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Current driver # 3 – potential impact of medical advances
l Cancer – greater prevalence of screening to aid in early detection of cancer (eg breast & prostate)
l Heart attack – impact of troponins
l Multiple sclerosis –impact of new diagnostic techniques (eg interferon beta & MRI scans)
Current drivers of morbidity experience
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Current driver # 4 – robustness of definitions against legal challenges
l Medical definition vs insurance definition
l Impact of changing view of Financial Services Ombudsman Scheme:
– They operate on a “fair & reasonable” basis
– 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
Current drivers of morbidity experience
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Current driver # 5 – changing consumer attitudes & expectations
l Policyholder reasonable expectations (PRE)
l Increased financial understanding
l Increased awareness about their rights
l Consumer activity in uncertain economic times– Reduction in house sales will directly impact on
mortgage related CI
Current drivers of morbidity experience
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Current driver # 6 – increase in solvency requirements
l Solvency 1 comes into effect on 1 January 2004 for financial years on or after this date
l Will impact on any products in the PHI fund which includes stand alone CI & the CI component of accelerated CI– GI style calculation starting at 18% of premium
income or 26% of claims– Can be reduced to a third provided certain
conditions are met
Current drivers of morbidity experience
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The Control Cycle – the future?
Product Design
Pricing
Marketing/Sales
UnderwritingClaimsManagement
Valuation
Experience Monitoring
Reinsurer
Current drivers of morbidity experience
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Experience trends
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CI experience in the UK
l Health Care Study Group – 1991 to 1997 analysis of insured experience
l CMI – 1998, 1999 insured experience
l CI Trends Working Party – population trends
Experience trends
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Accelerated – exposed to risk (ETR)& claims file
1005,0741003,281,875TOTAL
84179290,643FSM
261,310361,184,541FNS
1889112386,057MSM
482,456431,420,634MNS
%# claims%# policiesSegment
ClaimsClaimsETRETR
Source: A Critical Review, March 2000
Experience trends
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Stand Alone - exposed to risk (ETR)& claims file
100462100359,108TOTAL
836519,328FSM
2712631109,388FNS
13611034,776MSM
5223754191,766MNS
%# claims%# policiesSegment
ClaimsClaimsETRETR
Experience trends
Source: A Critical Review, March 2000
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Total - exposed to risk (ETR)& claims file
1005,5341003,637,133TOTAL
84538309,971FSM
261,436361,293,929FNS
1795212420,833MSM
492,693441,612,400MNS
%# claims%# policiesSegment
ClaimsClaimsETRETR
Experience trends
Source: A Critical Review, March 2000
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Accelerated CI - CIBT93, all ages, all durations
4243Female aggregate
5055Female smoker
4040Female non-smoker
4446Male aggregate
6263Male smoker
4142Male non-smokerAmounts (%)Policies (%)Segment
Experience trends
Source: A Critical Review, March 2000
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Accelerated CI- CIBT93, male aggregate, policies
46534531All ages5256365061+4752453151 – 604552433041 – 504653433331 – 404964602630 & under
All Dur(%)
Dur’n 2+ (%)
Dur’n 1 (%)
Dur’n 0 (%)
Age
Experience trends
Source: A Critical Review, March 2000
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Accelerated CI- CIBT93, male non-smoker, policies
50431991-975043199747361996
444019955247199446481993
5757199270701991
Subset(%)
All companies(%)
Calendar year
Experience trends
Source: A Critical Review, March 2000
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Stand Alone vs Accelerated CI (aggregate)
4263Female (amounts)4444Male (amounts)4349Female (policies)4643Male (policies)
Accelerated(%)
Stand Alone(%)
Experience trends
Source: A Critical Review, March 2000
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Accelerated CI – updated amounts
474242FAgg633950FSM444340FNS393244MAgg694662MSM332941MNS
1999(%)
1998(%)
1991-97(%)
Experience trends
Source: A Critical Review, March 2000 & CMI investigations
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Stand Alone CI – updated amounts
565963FAgg765885FSM546060FNS474244MAgg617060MSM443942MNS
1999(%)
1998(%)
1991-97(%)
Experience trends
Source: A Critical Review, March 2000 & CMI investigations
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Critical illness – summary of experience trends
l Accelerated:– Significant change in mix of
offices between 1991-97 and subsequent years
– 1998 limited credibility due to low volume of data
– 1999 experience indicates:l For males overall there is a
slight improvement, but smokers have deteriorated
l For females there is an overall deterioration (more so for non-smokers)
l Stand Alone:– Significant change in mix of
offices between 1991-97 and subsequent years
– 1998 limited credibility due to low volume of data
– Stand alone less than 20% of total CI claims; therefore, less credible than accelerated
– 1999 experience indicates:l Overall males & females
have shown a slight deterioration
Experience trends
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CI Trends Working Party – population trends
l Cancer– Historic population trends by key site and overall– Impact of screening programmes– Impact of smoking
l Heart-related conditions– Heart attack, CABG, angioplasty– Impact of preventative treatments & interventions
l Non-CI deaths
Experience trends
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The future of the UK market
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The future of the UK CI market
l Has the guaranteed CI market come to an end?
l How do we keep coverage meaningful and affordable?
l Is the CI product in need of a radical overhaul?
The future of the UK CI market
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Option # 1 – extending the “reviewable” principle
l Beyond the premium rates
l Extend to other contract features, eg CI conditions
l Extreme is a short-term renewable product design
l Definitions would change in line with medical advances especially with respect to diagnostic techniques
l Cover evolves to deal with truly “critical” events
The future of the UK CI market
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Option # 2 – tailored benefit based on severity
l Current focus of product is on “windfall” payments rather than addressing the “health” needs
l Size of benefit will depend on the severity of the condition, eg staging in cancer claims
l Cover evolves to deal with truly “critical” events
The future of the UK CI market
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Product design – issues to consider
l Regulatory/legal acceptance of evolving CI definitions (option # 1)
l Regulatory classification of CI cover subject to frequent reviews (option # 1)
l Developing consumer awareness & acceptance for a regularly reviewable proposition (option # 1)
l Alignment with industry standards for CI (both options)
l Processes & systems capable of delivering regular policyholder communication (option # 1)
The future of the UK CI market
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Comparisons with other markets
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General
l Sold since 1980 in South Africa, the UK, Australia, Japan, Canada and other
l In the US the initial forms were primarily cancer coverage
l Early US market development not a great success, but renewed interest since 1996
Comparisons with other markets
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South Africa
l South Africa was one of the first countries to introduce a comprehensive CI product
l Innovative product design concepts– scaled benefits based on severity was introduced
in South Africa with typically four to eight severity levels which pay multiple payments as the illness progresses
– unbundled products provide choice from basic to comprehensive design
Comparisons with other markets
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United Statesl Basic product design
– Stand alone (majority)– Benefits reduce to 50% at age 65– Return of premium upon death– Guaranteed renewable; premium guaranteed for 1 to 2
years– Waiting period = 30-90 days for cancer & 0-30 days for all
other conditions– Survival period = 0 days– Core conditions - cancer, heart attack, stroke, kidney
failure, MOT
l Innovations – partial payments, unbundled productsl Worksite is primary distribution method
Comparisons with other markets
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Questions & discussion