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    to be cropped. Critical Illness Insurance: An Introduction to Pricing

    Chris Jewson

    22 October 2015

    Head of Protection Pricing, UK & Ireland

  • 2

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    Agenda

    The Evolution of Critical Illness Pricing

    Setting The Long-Term Trend Assumption

    Product Innovation

    Adding New CI Conditions

    Severity-based Payments

    Multi-pay Critical Illness

    Lessons Learned

    Recent Research

    Risk Management Controls

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    The Evolution of Critical Illness Pricing

    Variety of product designs, influenced by pricing uncertainty and with support of reinsurers

    Accelerated term assurance

    Typically 6 or 7 CI conditions

    Flexible Whole of Life (Universal Life)

    Unit-linked with investment underpin

    Mortgage endowment assurance

    Pays full sum assured on expiry, if not already claimed

    With-profits allows for retrospective pricing via bonuses

    1980s: The Early Pioneers

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    The Evolution of Critical Illness Pricing

    Research paper presented in January 1990, more commonly known as Dash & Grimshaw after its authors

    Recognised the lack of reliable data on post-CI mortality from non-CI causes, which is needed to price an accelerated term assurance

    Proposed the heroic assumption that post-CI mortality from non-CI causes is the same as the mortality of healthy lives

    Accelerated incidence rate = ix + (1 - kx) qx ix = critical illness incidence rate

    qx = mortality rate

    kx = proportion of deaths that are due to a critical illness

    1990: Dread Disease Cover, An Actuarial Perspective

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    The Evolution of Critical Illness Pricing

    Actuarial research paper presented in March 2000

    Developed the first UK Critical Illness Base Table (CIBT93) from population data

    Also presented an analysis of insured lives experience for the period 1991-97

    2000: A Critical Review

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    The Evolution of Critical Illness Pricing

    Reinsurers started to worry about future trend and reduced or withdrew capacity at guaranteed rates

    Guaranteed capacity reserved for key clients & distribution channels

    Reviewable rates for everyone else

    GE continued to offer guaranteed CI in volume

    Prudent margins: priced for >3% p.a. deterioration in experience

    Guaranteed rates ~40% higher than reviewable

    Significant profits

    2003: Reinsurers get Cold Feet

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    The Evolution of Critical Illness Pricing

    Actuarial research paper presented in December 2006

    A major report (over 200 pages) with substantial commentary on individual conditions, trends etc.

    Developed the second UK Critical Illness Base Table (CIBT02) from population data

    Presented as a work-in-progress and never fully completed

    2006: Exploring the Critical Path

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    The Evolution of Critical Illness Pricing

    The first full UK industry tables using insured lives data

    Graduated from the industry experience submitted by CMI members

    Covers experience during 2003-2006

    More stable mix of contributing offices than previous industry data

    Still immature by age and duration

    2011: AC04 Standard Tables

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    The Evolution of Critical Illness Pricing

    Consistent reporting of claim dates

    Date of Diagnosis / Reporting / Claim / Settlement

    Consistent reporting of claim amounts

    Mortgage business

    Child CI, other part payments, proportionate settlements

    Cause of claim

    Lack of consistency, free-form entries

    Recording of deaths caused by CI

    Incurred But Not Settled (IBNS)

    Can be lengthy delay from claim to settlement

    Data Challenges

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    The Evolution of Critical Illness Pricing

    Mix of products has changed

    Old: Endowments, light underwriting

    New: Pure protection (term assurances), stringent underwriting

    Mix of contributing offices has changed

    Different underwriting standards

    Different distribution models

    Inconsistent from one industry study to the next

    Industry Study Challenges

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    The Evolution of Critical Illness Pricing

    Industry Study Challenges

  • 13

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    The Evolution of Critical Illness Pricing

    History of Industry Studies

    2000 CIBT93 Graduated population tables

    2000 1991-97 insured lives experience

    2005 1999-2002 insured lives experience

    2006 CIBT02 Graduated population tables

    2007 CIIT00 Unofficial GenRe graduation of 1999-2002 CMI data

    2011 AC04 First official graduated tables based on 2003-06 insured lives experience

    2011 2003-06 insured lives, further analysis by major cause of claim

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    instructions on how to

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    The Evolution of Critical Illness Pricing

    Comparison of UK Data Sources

    Reinsurer data

    Single client

    Industry data

    CMI, pooled

    Population data

    Data size Small but directly relevant to insured population

    Includes rating factors such

    as age, gender, product,

    duration, cause of claim etc.

    Larger database, most

    major insurers contribute

    data

    Massive data set for

    England & Wales

    general population

    Analysis Own choice of methodology Industry body analyses the data and summarises the

    results, saving us time

    - No underwriting

    - Does not match insured

    definition of illness

    Problems - Small sample size - High degree of volatility

    when analysing a subset of

    data in more detail

    - Data aggregated across

    multiple insurers

    - Limited to the published

    analyses only

    - Not insured lives

    population

    - HES: hospital visits, not

    1st incidence

    Credibility - No data for new business - Past claims experience may

    not be appropriate for new

    business

    - Aggregated over insurers

    with different illnesses

    covered and underwriting

    standards

    - Lots of adjustments

    required for insured

    lives, underwriting, 1st

    incidence etc.

    Changes over

    time

    - Conditions covered,

    definition of illness,

    underwriting standards,

    corporate re-organisation

    - Mix of insurers and

    products

    - Definition of illnesses

    Can monitor trends as

    the population becomes

    more health conscious

    or obese

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    The Evolution of Critical Illness Pricing

    Source: Continuous Mortality Investigation (CMI)

    UK Selection Pattern by Duration and Risk Class

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    The Evolution of Critical Illness Pricing

    Source: Continuous Mortality Investigation (CMI)

    Cause of Claim, UK: Males

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    The Evolution of Critical Illness Pricing

    Source: Continuous Mortality Investigation (CMI)

    Cause of Claim, UK: Females

  • 18

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    instructions on how to

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    The Evolution of Critical Illness Pricing

    History of RGA Pricing

    2000 Derived from population data with adjustments to estimate

    an insured population

    2004 Insured lives experience starting to emerge at early

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