Critical Illness Design

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Critical IllnessDesign Pricing
Caribbean Actuarial Association- 2004 -
Accepting New Realities
Presentation by Sylvain Goulet, FCIA, FSA, MAAA
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Critical Illness- Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Critical Illness - Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Product Design Issues- The Simplest Form -

• Lump Sum Payment
• Lump sum payment at the onset of a covered
  illness or condition
• Not disability income
• No proof of need required, just proof of the
  condition
• Type
• Stand-alone basis
• Rider, attached to a base life insurance policy

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Product Design Issues- The Simplest Form -

• Major Conditions The Big 4
• Cancer numerous alternatives
• Heart Attack
• Stroke
• Coronary Artery
• Bypass Surgery

With or without a 30-day survival period
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Product Design Issues- The Simplest Form -

• Other Adult Conditions
• Alzheimer
• Kidney failure
• Major organ transplant
• Paralysis, etc.
• Children Conditions
• Cerebral palsy
• Cystic fibrosis
• Downs syndrome

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Critical Illness - Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Product Pricing Issues- Costs Consideration -

• Differences by Sex
• Male incidence rates almost always higher than
  female incidence rates
• Differences by Smoking Status
• A big increase around ages 60-75
• Slowdown (non-smoker) and plateau or decrease
  (smoker) around ages 80-90
• Then rates increase very fast at older ages

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Product Pricing Issues- Costs Consideration -
Male vs Female Non-Smoker
Prostate Cancer, Heart Attack Stroke
Breast Cancer, Heart Attack Stroke
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Product Pricing Issues- Costs Consideration -
Male vs Female Smoker
Lung Cancer, More Severe Heart Attack Stroke
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Product Pricing Issues- Costs Consideration -
Non-Smoker vs Smoker (Male)
Lung Cancer, More Severe Heart Attack Stroke
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Product Pricing Issues- CI Compared to Mortality
-

• Male Non-Smoker issue age 20, ultimate
• Morbidity almost always higher than mortality,
  but not so at the much older ages
• 20-29 -12
• 30-39 33
• 40-49 94
• 50-59 87
• 60-69 63
• 70-79 14
• 80-89 -42
• 90-99 -64

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Product Pricing Issues- Costs Consideration -
CI Incidence vs Mortality (Male NS)
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Product Pricing Issues- Characteristics -

• Much Like Life Product
• Low incidence rates at younger ages, increasing
  rapidly at older ages
• Smokers higher than non-smokers (lung cancer,
  heart diseases, etc.)
• Male rates higher than female rates
• Lapse-Supported
• Behaves like a Term to 100
• Must assume low lapse rates at higher durations
  and higher attained ages

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Critical Illness - Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Profitability and Risk Considerations- How to
Mitigate Costs -

• Conditions Covered
• Include the big 4 as a base plan (75-85 of
  the cost)
• Offer other conditions as riders
• Offer packages to avoid anti-selection
• Differences by Smoking Status
• Most conditions create higher rates for smoker
  than for non-smoker
• A big increase for smokers around ages 60-75

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Profitability and Risk Considerations - How to
Mitigate Costs -

• Offer Other Benefits to Even Out the Costs
• Price with Cash Surrender Values (CSV)
• Offer Return of Premiums (ROP)
• Protect the Downfalls
• Offer non-guaranteed rates plus a rider for
  guaranteed rates
• e.g. 8.00/1000 2.50/1000 for guaranteed rates
• price the base appropriately and the rider
  conservatively

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Profitability and Risk Considerations - How to
Mitigate Costs -

• Change the Benefits Structure
• Change the of benefits paid, for example
• 20-65 100
• grading to 70 at 75
• grading to 60 at 80
• grading to 45 at 90
• grading to 25 at 100
• Lower ultimate costs at older ages
• Consistent with reduced financial needs (children
  gone, house paid, etc.)

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Product Pricing Issues- Costs Consideration -
100 CI Incidence Full Benefits
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Product Pricing Issues- Costs Consideration -
100 CI Incidence Partial Benefits
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Profitability and Risk Considerations - How to
Mitigate Costs -

• Change the Benefits Structure
• Change the of benefits paid, for example
• 20-65 100
• grading to 70 at 75
• grading to 60 at 80
• grading to 45 at 90
• grading to 25 at 100
• Lower total premium rates for all issue ages,
  especially older ones
• Greatly reduces the lapse-supported nature of
  these products

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Profitability and Risk Considerations - How to
Mitigate Costs -

• Offer RC Term Premiums
• For example, T10 RC
• Lower going-in premiums, increasing rapidly at
  renewal
• Guaranteed premiums for the first 10 or 20 years,
  then non-guaranteed
• Could increase say to age 70, then convertible to
  whole life rates
• In Canada
• 40 RC, 39 Level, 18 Permanent, 3 Others
  (source Munich Re Survey)

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Profitability and Risk Considerations - How to
Mitigate Costs -

• Differences by Country
• Extending some countries experience to other
  countries must be done carefully
• Focus on common characteristics
• The Big 4 account for 75-80 (may not always be
  the case in all countries)
• Cancers, Heart Attacks, Strokes usually well
  documented
• Similar pattern by sex and age
• Allow for more margins, or non-guaranteed rates

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Critical Illness - Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Reinsurance Issues- Typical Reinsurance
Constraints -

• Non-Guaranteed Rates
• Offer non-guaranteed products backed by the
  reinsurer and a Guarantee rider at a
  conservative cost (25 to 30)
• Until the reinsurer increases the rate, you keep
  the rider premium
• Try to negotiate maximum reinsurance rates first
  (cost of the rider)

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Reinsurance Issues- Typical Reinsurance
Constraints -

• Attained Age Limit (Coverage) of 65-75
• Offer a to age 65/75 product with an
  Extension rider for life, with decreasing
  benefits after 65/75
• Offer CSV benefits or ROP to mitigate the cost
  (not reinsured)
• Negotiate steps down ceding percentages up front,
  maybe linked with declining benefits
• e.g. 60 reinsured up to 75, declining to 30
  afterwards

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Reinsurance Issues- Typical Reinsurance
Constraints -

• Lower Face Amounts
• Typically lower face amounts
• Not as much need for reinsurance, depending on
  individual retention limits
• Cost per 1000 usually more expensive

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Critical Illness - Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Incidence Rates- Development of Rates -

• Empirical data
• Difficult to obtain because limited access and
  experience (direct writers and reinsurers)
• Research Development
• Available in Canada, USA, UK, Australia
• Canada much ahead of the USA, which is new at
  offering CI
• May Need adjustment for the Caribbean, Latin
  America and other territories

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Incidence Rates - Development of Rates -

• See Sample Pricing Tables

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Incidence Rates - Development of Rates -
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Critical Illness - Design Pricing -

• Product Design Issues
• Product Pricing Issues
• Profitability and Risk Considerations
• Reinsurance Issues
• Incidence Rates Development of Rates
• Conclusions

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Conclusions

• Simple Approach
• Big 4 causes 75-80 of total incidence
• Incidence rates available from reinsurers (with
  exclusivity confidentiality) or consultants, no
  CSV, discount rates, etc.
• Easy to design and price it seems so!

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Conclusions

• Pitfalls
• Differences across countries lack of reliable
  or available data in many Caribbean countries
• Differences across countries CI rates
  differences not the same as mortality rates
  differences
• Higher profitability targets to recognize more
  uncertainty in future experience
• Lapse-supported nature lapse rates assumption
  is crucial
• Reinsurance restrictions work around them by
  offering special riders

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Conclusions

• Complex / Flexible Approach
• Sometime large differences by sex, age, smoking
  status
• Reflect different benefits (non-level)
• Reflect guarantees and/or non-guarantees
• Reflect different structure permanent, limited
  ages, RC
• Creativity in designing a product that works for
  the markets

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Thank you very much ...

• If you wish a copy of this presentation, please
  send an email to syg_at_eckler.ca / website
  www.eckler.ca