Critical Illness – Global Market Overview

IAA Health Section – Critical Illness Topic Team

Presented by Sue Elliott (chair), Neil Hilary and Peter Temple

1 June 2006

SUMMARY

Introduction

Regions around the globe:Asia PacificAustraliaCanada IrelandSouth Africa*United StatesUnited Kingdom*

Discussion

Introduction

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

Critical Illness Topic Team Members

Sue Elliott – United Kingdom (chair)Andres Webersinke – Asia PacificRichard Houde – CanadaAvi Bar Or – IsraelJaime Jean – MexicoPeter Davies – New ZealandAudrey Kudryavtsev – RussiaPeter Temple – South AfricaDarrell Spell – United StatesHank George* – United States (underwriter)

* resigned, but provided some initial input

Critical Illness – Regions around the globe

Asia Pacific

Source: SoA CI Seminar, September 2005, Baltimore

Individual & institutions

Large7 (approx)8 to 20Taiwan

IndividualKRW 3 billion13 (approx)3Korea

Individual & institutions

Unknown13 (approx)3India

Individual35% of life policies

Over 2015 Hong Kong

Individual & institutions

15-20% of total premium

27 (approx)10China

Target marketMarket size (approx)

# of companies

Years in market

Region

Asia Pacific

Premium guarantees:- CI plans in Singapore, Malaysia and some other

Asian marekts are sold with premiumguarantees

- however, the trend is shifting towardsnon-guaranteed rates for this rider benefit (especially in Malaysia and Singapore)

Standardized definitions:- standardized in some markets such as Taiwan,

Singapore and Malaysia- ‘standard’ is better than in the UK (ie more

detailed/stricter than the ABI standard)

Claims surveys available in some markets

Market is influenced by reinsurers and marketingdepartments of direct insurers

Source: CI Topic Team

Australia

18 years in the market

Approximately 14 companies

Product features/characteristics:- basic and extended contracts available- covering between 4 and 40+ illnesses/events- cancer, by-pass, stroke and heart attack

account for 85% of paid claims (IoA Australia)- single disease products not available- all provide lump sum benefits with minimum of

$10,000- mainly sold as options to term policies, but

stand alone also available- two companies offer female products

Market size: about 17% of the population

Target: individual marketSource: SoA CI Seminar, September 2005, Baltimore

Canada – sales (# policies)

Source: Munich Re, CRC 2006

010,00020,00030,00040,00050,00060,00070,00080,00090,000

100,000

1998 1999 2000 2001 2002 2003 2004 2005

Canada – sales demographics

Average age around 38

75% of buyers are between 35 and 54

Half of sales are to females

Over 80% of sales are non-smokers

Source: Munich Re, CRC 2006

Canada – buying pattern

Average annual premiums around $1,100

Average size benefit amount around $91,000

Coverage for about 24 conditions

A majority of sales have return of premium feature

Source: Munich Re, CRC 2006

Canada – sales mix by plan

Source: Munich Re, CRC 2006

23Other4226Permanent2228Renewable term3443Level pay

2004(%)2003 (%)Plan

Canada – overview of individual market

21 companies

Coverage of 30+ conditions including partial benefits

T10, T75 and T100 and other term products

ROP on surrender, death and maturity

Conversions or coverage switch

Premium guarantees

Moratorium on cancer and benign brain tumour

Source: Munich Re, CRC 2006

Canada – hot topics

Return of premium features

Premium rate guarantees

Number of illnesses covered

Standardized definitions

Source: Munich Re, CRC 2006

Ireland

The Society of Actuaries in Ireland

1994 invesitgation

Production of 1st published IC94 table to aid in reserve reporting

IC94 was:- both male and female, no select period,

aggregate smoker- based largely on UK population data- adjusted for Irish experience and to convert to‘insured’

- allowance added to Total & PermanentDisability

Source: SoA CI Seminar, September 2005, Baltimore

Dread disease in South Africa

Evolution

In South Africa:- first product in 1983 - 4 conditions- further 8 (‘core’) and then further 21(‘extended’) definitions

- now differing severity level critical illnesscoverage

- some are not diseases or illnesses butsurgeries or states of health

Currently more than 50 conditions covered

Changes due to medical advances

Product development: Grouping of Conditions & Separate Claims

Selecting individual conditions or groups of conditions

Multiple claims possible

Offers greater flexibility

Insurer exposed to risks on single diseases / body systems

Product development: Severity Levels

Benefit payments are linked to severity levels- severity levels are determined by pre-defined objective medical definitions

- multiple payments are allowed for single ormultiple conditions

- cover is selected for Severity levels A-D(100%, 75%, 50%, 25%) or A-G (100%-5%)

Severity Levels:Cancer Example

Level Definition Benefit paid

A Stage 4: tumour extending beyond organ with nodes and/or distant metastases

100%

B Stage 3: tumour within organ with re-gional lymph node spread

75%

C Stage 2: tumour invading organ, no lymph node involvement

50%

D Stage 1: primary tumour site with no spread within organ

25%

E Carcinoid syndrome or pre-leukemia syndrome 15%

F Basal cell carcinoma >4 cm, squamous cell carcinoma >4 cm, prostate cancer T1N0M0

5%

Product development: Whole Family Benefit and Multiple Lives

Product that covers family under principal policyholder policy:

- female specific conditions- marriage & birth- child specific conditions- trauma

Cradle to the grave…

Product that covers multiple lives:- up to 10 people- need not be a family- flexibility

Product development: Reinstatment options and ‘Catch-all’ benefit

Reinstatement:- option to increase life cover to previous level- option to reinstate dread cover (with

exclusions)

‘Catch-all’ included to cover events not onpredefined list

- occupational disability definition- failure of predefined number of ADL’s- reaching predefined WPI level

United States – product overview

Stand alone (majority)

Benefits reduced to 50% at age 65

Return of premium upon death

Guaranteed renewable (premium guaranteed for two years)

Waiting period – 30 to 90 days for cancer; 0 to 30 days for all other conditions

Survival period – 0 days

Core conditions – cancer, heart attack, stroke, kidney failure, MOT

United States – key issues

The most significant issue facing the US market is customer acceptance

There are also significant regulatory hurdles

Data:- good news – there is some good population data- bad news – do not yet have good insured data- however – able to estimate insured data from populationdata

Source: CI Topic Team

United States – views from an underwriter‘Primitive’ critical illness market

Key issues:- getting insurers to consider developing the product- getting regulators to at least understand the product as

distinct from the historic ‘cancer insurance’ covers- increasing the number of reinsurers supporting the market- gearing up underwriters to underwrite the product

in-house rather that outsource underwriting to specialists(like was done for LTC)

- getting producers to take the time to understand theproduct and see how easy it is to sell

- reassuring ‘skittish’ carriers that poor UK experience inrecent years does not mean the product is flawedintrinsically but rather that there are lessons to be learned

- convincing health/medical, disability and LTC carriers toexplore connectivity between their products and CI

US industry activity:- annual SOA CI Conference- LOMA CI Study Group

Source: CI Topic Team

Critical illness in the UK

627694

783 780872

11681066

737

0

200

400

600

800

1000

1200

1997 1999 2001 2003

New Polices ('000's)

United Kingdom – individual CI sales

• One of the UK insurance industry’s success stories

• Appeal:– simplicity– ‘perceived’ need– windfall element

• Currently profitable:– robustness of

definitions?– potential impact of

medical advances given that claims trigger is based on diagnosis

• Heavily reinsured Source: Swiss Re Term & Health Watch 2005

United Kingdom – group CI revenue

6.5

9.910.9

16.221.3 24.3

0

2

4

6

8

10

12

14

16

1999 2000 2001 2002 2003 2004

Premiums £million • Strong growth, from a low base

• Role within flex / voluntary schemes responsible for growth

• Lives covered small relative to individual market

• Group critical illness remains a small market relative to other employee benefits

Source: GE Frankona – Group Risk Survey

Current drivers of UK CI market

Reducing reinsurance capacity and support

Long-tem premium guarantees

Change in capital and solvency requirements

Potential impact of medical advances

Robustness of definitions against legal challenges

Changing consumer attitudes and expectations

Industry/regulatory response to drivers

May 2005 – Association of British Insurers (‘ABI’) consultation paper on reviewable premium business

August 2005 – ABI consultation on the ‘Critical Illness Statement of Best Practice’

April 2006 – ABI release of updated ‘Critical Illness Statement of Best Practice’

Financial Services Authority (‘FSA’) Treating Customers Fairly (‘TCF’) initiative

ABI consultation – the ‘fair’ treatment of reviewable premium business

Reviewable – background & ‘current state of play’

Financial Ombudsman’s Service (‘FOS’) concerns:- potential ‘un-fairness’ of how review clauses are (or couldbe) operating in practice

- do they comply with the ‘Unfair Terms in ConsumerContracts Regulations (‘UTCCR’) 1999’?

- ‘fair and reasonable’ basis?

FSA – ‘Treating Customers Fairly’ initiative

FSA – Statement of Good Practice

ABI – consultation on guidance on reviewable premium business

FSA – ‘Fairness of terms in consumer contracts –Statement of Good Practice’

May 2005

Sets out what the FSA considers to be good practice for two specific types of contracts:

- contracts with an interest rate variation clause- contracts with a premium review clause

Published guidelines indicating that providers must improve clarity about when and why they will review premium rates for protection products

Whey/why – ‘valid reasons’ or events outside the control of insurers

‘Valid reasons’ – need to be clearly and unambiguously defined

ABI – Advice on treatment of reviewble premiums

Published later in May 2005 to coincide with the FSA guidelines

Consultation closed on 15 July 2005

ABI sought legal advice which was:

‘There is no fundamental reason why long term insurance contracts with reviewable premiums breach the UTCCR'sprovided that the basis of the premium reviews is set out in thesales literature and policy documentation and that the method of calculation is applied in a fair and reasonable manner.’

Included an ‘example review’ – intended to provide companies with practical advice on how to comply with the UTCCR's and apply the FSA Statement of Good Practice

Primary targets for improvement

Clarity at the point of sale

Clarity about the criteria for review

Explanation of how the criteria are applied to calculate premiums

Introduction of an explicit ‘fair and reasonable’requirement in applying the specified basis of calculation

Initial feedback on ABI consultation paper

A welcome step forward to address the concerns regarding the treatment of reviewable premium business

Initial concerns regarding the potential for a substantial increase in paper provided to the consumer at point of sale (ie ‘exhaustive list of assumptions’ that could potentially change)

Material provided to the consumer should:- be simple and understandable- not overwhelm the consumer with data and

formulae

ABI consultation – review of the CI Statement of Best Practice (‘SOBP’)

A brief history of the CI SOBP

1998 – Office of Fair Trading published critique of protection products

1999 – ABI project King delivers original CI SOBP

May, 2002 – first full review delivers new heart attack definition (introducing the use of troponin tests to detect heart attack) and a prostate cancer exclusion (covering severe only)

August, 2005 – recent review

April, 2006 – updated CI SOBP released

Aims of the statement

Security – provides consumers with the safeguard that ‘appropriate minimum standards’ of cover are used across the industry, ensures that cover remains ‘affordable’ and continues to meet ‘customer needs’

Comparability – makes it easier to compare CI insurance from different insurers

Clarity – helps improve the understanding about what each product does and does not cover

Scope of the statement

Key features

Generic termsModel wordings for core conditions (7)

Model wordings for additional conditions (13)

Model exclusions

Review process (every 3 years):- effective April 1999- revised May 2002- consultation August 2005- updated released April 2006

Aims of the consultation

Improving clarity

Future proofing

Introducing two levels of cancer cover

Other ‘cosmetic’ changes to the SOBP

Improving clarity

Product name:- ‘Specified critical illness cover’ OR

introduce a definition of CI:

‘Critical illness insurance pays out on meeting thedefinition of a critical illness listed in your policy.Other conditions are not covered.’

Illness headings (eg):- ‘Cancer – malignant and invasive (with

exclusions)’- ‘Heart Attack – with ECG changes and specified

clinical symptoms’

Future proofing

This does not mean the definitions are reviewable

The aim is to keep the level of cover at current level but protect against future medical advances

More medical terminology/jargon - communication issues

The most important part to the consultation - impacts on pricing, reserving, guarantee loadings and capital requirements

ABI updated CI Statement of Best Practice

Outcome of the consultation

New ABI Critical Illness insurance initiative will improve consumer understanding

Launched 12 April 2006 following detailed consultation and consumer research

Richard Walsh, the ABI's Head of Health and Protection insurance, said:

‘The new Statement of Best Practice will mean customers have a much clearer explanation of what their product does and does not cover when they buy it and if they need to make a claim. This should also lead to fewer declined claims.’

Outcome of the consultation (continued)

Introduced a new standard description of critical illness:

‘Life and critical illness cover pays out a lump sum if you either die or are diagnosed with a critical illness that meets our policy definition. We only cover the critical illnesses we define in our policy and no others.’

Better descriptions of the illnesses covered (eg more descriptive headings):

‘Blindness – permanent and irreversible’‘Cancer – excluding less advanced cases’‘Coronary artery by-pass grafts – with surgery to divide the breastbone’‘Heart attack – of specified severity’

Discussion