UK Critical Illness Marketactuaries.org/IAAHS/Colloquia/Dresden/Elliott presentation.pdf · UK Critical Illness Market Sue Elliott, Senior Consultant Watson Wyatt LLP IAAHS – Colloquium

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

2Copyright © Watson Wyatt Worldwide. All rights reserved.

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


Introduction – the healthcare insurance risk


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


The Control Cycle – today

Product Design

Pricing

Marketing/Sales

UnderwritingClaimsManagement

Valuation

Experience Monitoring

Introduction


UK market overview


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


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


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


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


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


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


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


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


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 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?



The “traditional” reinsurance relationship



The “traditional” reinsurance relationship



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 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 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 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 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 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 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



The Control Cycle – the future?

Product Design

Pricing

Marketing/Sales

UnderwritingClaimsManagement

Valuation

Experience Monitoring

Reinsurer



Experience trends


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


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


Stand Alone - exposed to risk (ETR)& claims file

100462100359,108TOTAL

836519,328FSM

2712631109,388FNS

13611034,776MSM

5223754191,766MNS


ClaimsClaimsETRETR

Experience trends



Total - exposed to risk (ETR)& claims file

1005,5341003,637,133TOTAL

84538309,971FSM

261,436361,293,929FNS

1795212420,833MSM

492,693441,612,400MNS


ClaimsClaimsETRETR

Experience trends



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



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



Accelerated CI- CIBT93, male non-smoker, policies

50431991-975043199747361996

444019955247199446481993

5757199270701991

Subset(%)

All companies(%)

Calendar year

Experience trends



Stand Alone vs Accelerated CI (aggregate)

4263Female (amounts)4444Male (amounts)4349Female (policies)4643Male (policies)

Accelerated(%)

Stand Alone(%)

Experience trends



Accelerated CI – updated amounts

474242FAgg633950FSM444340FNS393244MAgg694662MSM332941MNS

1999(%)

1998(%)

1991-97(%)

Experience trends

Source: A Critical Review, March 2000 & CMI investigations


Stand Alone CI – updated amounts

565963FAgg765885FSM546060FNS474244MAgg617060MSM443942MNS

1999(%)

1998(%)

1991-97(%)

Experience trends

Source: A Critical Review, March 2000 & CMI investigations


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


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


The future of the UK market


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?



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



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



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)



Comparisons with other markets


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



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



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



Questions & discussion

Documents

UK Critical Illness Marketactuaries.org/IAAHS/Colloquia/Dresden/Elliott presentation.pdf · UK Critical Illness Market Sue Elliott, Senior Consultant Watson Wyatt LLP IAAHS – Colloquium