critical illness pricing - can prices get any lower (ms ... · critical illness pricing: can prices...

14/05/2014

1

Critical Illness Pricing:Can Prices get any Lower?

Matthew Smith, Pacific Life Re

14 May 2014

Critical Illness PricingCan Prices get any lower?

14 May 2014

Themes…

14 May 2014 3

• How critical illness pricing compares with term assurance

• Historic changes in attitude to critical illness pricing

• Potential drivers to tumbling CI prices

• Are we missing anything. Definition creep, trend risk and more…

• Lessons from around the Globe

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Critical Illness Pricing- Premium Rates in the Recent Past

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0

10

20

30

40

50

60

70

80

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Sta

nd

ard

ise

d R

ate

Year

Guaranteed CI Reviewable CI LifeSource: MoneyFacts

50%

60%

70%

80%

90%

100%

110%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Ra

te a

s %

of

200

4

Year

Guaranteed CI Reviewable CI Life

Critical Illness Pricing- And as a % of 2004 rates

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Around a 25% reduction over 8 years

• Taxation• Gender directive

Source: MoneyFacts

Critical Illness Pricing- Potential Drivers for Price Reductions

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Reinsurance Rates

• Reinsurer morbidity basis (base tables, future trends)• Reinsurer margins (capital, expenses, margins)• Quota share %

Pricing Basis

• Morbidity basis (base tables, future trends)• Lapse basis

Margins & Competition

• Expense reductions, commission rates• Margin Cuts• Capital & guarantee loadings

Let’s focus on the morbidity basis…

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3

Mortality vs Morbidity Pricing- History of Critical Illness as a Product

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Mid 80s: Launch of CI in the

UK

1990: “Dread Disease

Cover – an Actuarial

Perspective” Published

1990s: Gained

momentum

1999:

ABI SoBP

2000: “A Critical Review”

Published (CIBT93)

2002:

ABI SoBP

2002: Sales peak, highly

competitive

2003: Swiss Re withdrew,

prices increased

2004:

ABI SoBP

2005: CMI

Publish WP18

and make the 99-02

data available

2006:

ABI SoBP

2006: “Explorin

g the Critical Path”

Published (CIBT02)

2007: Gen Re

Publishes CIT00 Tables

2010: CMI

Publish WP43

and produce

draft tables

2011:

ABI SoBP

2011: CMI

publish WP50

and produce

the ACL04 tables

2013: “Extending the Critical

Path” Published (CIBT08)

0

100

200

300

400

500

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013New Business Premium

£m

Stand Alone CI Accelerated CI (Whole Life/Endowment/Other) Accelerated CI (Term)

Healthy

DeadCritical Illness

Mortality vs Morbidity Pricing- How does Pricing Compare to Mortality?

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“Mortality rates are more complicated than morbidity rates…

for the former, you have to fall ill anddie, not just fall ill”

Death from non-CI cause

Clearly this is nonsense…

Mortality vs Morbidity Pricing- Perception of Greater Uncertainty around Morbidity Pricing?

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Morbidity vs

Mortality

Definition drift

Growing condition coverage

Less data

TCF & non-

disclosure

No/lower mortality

imps

Event is Diagnosis

Ups?

Downs?

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Potential Drivers to Pricing Changes- Growing coverage… trends

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0

10

20

30

40

50

60

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Conditions

Average Number of Critical Illness Conditions

ABI Full Payment ABI+ Full Payment Partial Payment

Potential Drivers to Pricing Changes- Growing coverage… trends

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Phase I

• ABI Conditions• Aplastic Anaemia• Bacterial Meningitis• Creutzfeldt-Jacob Disease• Dementia• Liver Failure

Phase II

• Cardiomyopathy• Encephalitis• Multiple System Atrophy• Open Heart Surgery• Primary Pulmonary

Hypertension• Progressive Supranuclear Palsy• Respiratory Failure• Systematic Lupus Erythematosis

Phase III

• Partial Payments• Benign Spinal Cord Tumour• Cardiac Arrest• Chronic Rheumatoid Arthritis• Pulmonary artery surgery• Pneumonectomy• Devic’s Disease• Muscular Dystrophy

Etcetera…

Potential Drivers to Pricing Changes- Growing coverage… costing

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Increasing Incidence/ reducing overlap

Lik

ely

Hig

h D

ecl

ine

Ra

te

Don’t Even Bother

Ticking Time-Bomb

Genuine Value

Token Freebie

Creutzfeldt-Jacob DiseaseProgressive Supranuclear Palsy

Examples…

Bacterial MeningitisSystematic Lupus Erythematosis

CardiomyopathyChronic Rheumatoid Arthritis

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Potential Drivers to Pricing Changes- Growing coverage… price impact

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• Conclusion?

60%

65%

70%

75%

80%

85%

90%

95%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Office 1 Office 2 Office 3 Office 4 Office 5


Office 11 Office 12 Office 13 Trend Line

Potential Drivers to Pricing Changes- Treating Customers Fairly & Non-Disclosure…claims paid

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ABI TCF guidance

Source: Industry Claims Paid Publications & own calculations

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013




Potential Drivers to Pricing Changes- TCF & Non-Disclosure…claims declined for non-disclosure

14 May 2014 15

ABI TCF guidance


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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Paid Declined ‐ non‐disclosure Declined ‐ did not meet definition

Potential Drivers to Pricing Changes- Treating Customers Fairly & Non-Disclosure… impact on claims

14 May 2014 16

ABI TCF guidance

Potential Drivers to Pricing Changes- Treating Customers Fairly & Non-Disclosure… price impact

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• Conclusion?

Potential Drivers to Pricing Changes- Definition Drift…claims declined for not meeting the definition

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0%

2%

4%

6%

8%

10%

12%

14%

16%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013





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Potential Drivers to Pricing Changes- Definition Drift… claims paid examples where definition not met

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Case Study % Paid Where definition failed

MI – Infero basal hypokinesis 100%

MI - Mildly impaired systolic function 75%

Dilated cardiomyopathy – controlled well 56%

Sub-arachnoid – no sequelae 55%

Acoustic neuroma with surgery 45%

Possible MS (some kind of neurological disorder) 40%

One episode definite MS – full recovery 27%

Inoperable Glioma – no symptoms 25%

Source: Pacific Life Re’s “Grey Claims” Survey 2010

Increasing Severity

Potential Drivers to Pricing Changes- Definition Drift … price impact

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• Conclusion?

Potential Drivers to Pricing Changes- Data & Pricing Uncertainty…comparison with Mortality

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Mortality

• Established CMI investigation• History of mortality tables• High volumes of internal data

Morbidity

• Early reliance of population data• Growing CMI investigation• Tables in their infancy• Anti-selection unclear• Growing condition coverage

Is this changing?

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Potential Drivers to Pricing Changes- Data & Pricing Uncertainty…Growing CMI Dataset

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Source: CMI

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1999 2000 2001 2002 2003 2004 2005 2006

Cumulative Claim

s

Calendar Year

Cumulative Claims by Calendar Year in the CMI Investigation

All Claims Duration 5+ Claims Only

Potential Drivers to Pricing Changes- Data & Pricing Uncertainty…Growing CMI Dataset

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80%

85%

90%

95%

100%

105%

110%

115%

120%

1999 2000 2001 2002 2003 2004 2005 2006

Calendar Year

1 in 200 Confidence Intervals Around Observed Claims

All Claims Confidence Intervals 5+ Confidence Intervals

Potential Drivers to Pricing Changes- Data & Pricing Uncertainty…but not that simple

14 May 2014 24

Mix of products, underwriting years

Relevance to prospective experience is not clear

CMI methodology not perfect

Continually evolving

Select shape Limited ultimate claims, and particularly difficult to quantify given above

Age shape Credibility is limited at the table extremes and experience for minor conditions yet to emerge

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Potential Drivers to Pricing Changes- Data & Pricing Uncertainty… price impact

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• (Possible) Conclusion?

Potential Drivers to Pricing Changes- Trends… what conditions matter for males?

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

<30 30-34 35-39 40-44 45-49 50-54 55-59 60+

Cancer Heart Attack Stroke CABG Multiple Sclerosis Other TPD Death Source: PLRe Internal

Potential Drivers to Pricing Changes- Trends… what conditions matter for females?

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0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

<30 30-34 35-39 40-44 45-49 50-54 55-59 60+

Cancer Heart Attack Stroke CABG Multiple Sclerosis Other TPD Death Source: PLRe Internal

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80%

100%

120%

140%

160%

180%

200%

220%

240%

Breast Cancer Incidence as % of 1971 (Females)

20-39 40-59 60+ All

Potential Drivers to Pricing Changes- Trends… cancer…the ups

14 May 2014 28

Source: ONS Cancer Registry


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40%

60%

80%

100%

120%

140%

160%

180%

Colorectal Cancer Incidence as % of 1971 (Males)

20-39 40-59 60+ All



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0%

200%

400%

600%

800%

1000%

1200%

1400%

Melanoma Incidence as % of 1971 (Both)

20-39 40-59 60+ All


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0%100%200%300%400%500%600%700%800%900%

1000%

Prostate Cancer Incidence as % of 1971 (Males)

20-39 40-59 60+ All



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0%

50%

100%

150%

200%

250%

300%

350%

Testicular Cancer Incidence as % of 1971 (Males)

20-39 40-59 60+ All



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0%

100%

200%

300%

400%

500%

600%

700%

Thyroid Cancer Incidence as % of 1971 (Both)

20-39 40-59 60+ All


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Potential Drivers to Pricing Changes- Trends… cancer…the downs

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0%

20%

40%

60%

80%

100%

120%

Lung Cancer Incidence as % of 1971 (Both)

20-39 40-59 60+ All



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0%

50%

100%

150%

200%

250%

Cervical Cancer Incidence as % of 1971 (Females)

20-39 40-59 60+ All



14 May 2014 36

0%

20%

40%

60%

80%

100%

120%

Stomach Cancer Incidence as % of 1971 (Both)

20-39 40-59 60+ All


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Potential Drivers to Pricing Changes- Trends… overall cancer

14 May 2014 37

80%

100%

120%

140%

160%

180%

Cancer Incidence as % of 1971 (Both)

20-39 40-59 60+ All


Potential Drivers to Pricing Changes- Trends… does the mortality component help?

14 May 2014 38

0%

20%

40%

60%

80%

100%

120%

Residual Deaths as % of 1971 (Both)

20-39 40-59 60+ All


Potential Drivers to Pricing Changes- Trends… what about the cardio-vascular conditions

14 May 2014 39

Condition Trends

Heart Attack ▼/►Stroke ▼/►Coronary Artery Bypass-grafts ▼

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Potential Drivers to Pricing Changes- Trends… price impact

14 May 2014 40

• Conclusion?

Potential Drivers to Pricing Changes- Any others…?

14 May 2014 41

Impact?

Distribution management ▼BMI/alcohol ▲Underwriting Developments ??Persistency ??

Lessons from Around the Globe- Thyroid Cancer in Korea

14 May 2014 42

0

2

4

6

8

10

12

14

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Age Standardised

Rate per 10,000

Year

Australia Canada England Hong Kong Japan South Korea Taiwan USA

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Lessons from Around the Globe- Melanoma in Australia

14 May 2014 43

0

1

2

3

4

5

6

7

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Age Standardised

Rate per 10,000

Year


Lessons from Around the Globe- Prostate Cancer in North America/Australia

14 May 2014 44

0

2

4

6

8

10

12

14

16

18

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Age Standardised

Rate per 10,000

Year


Lessons from Around the Globe- Colorectal Cancer in Asia

14 May 2014 45

0

1

2

3

4

5

6

7

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Age Standardised Rate per 10,000

Year


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Summary- Can prices get any lower?

14 May 2014 46

• Given the movements in declined claims• And the increasing coverage/definition drift• As well as general cancer trends

It’s a surprise they’ve reduced

so much!

• Uncertainties relative to mortality pricing are still present• Despite the growing volumes of data• Should note what has happened around the world

Still a risky product

• Coverage is growing• Need to be ready for any surprises• Care required over definition creep and declined claims trends

Evolving

Summary- Possible Conclusions

14 May 2014 47

• Ensure margins vs mortality are sensible• Emerging experience is uncertain given complexity of select

discounts and changing distribution landscapePricing Discipline

• Consider size related Thyroid cancer exclusions• General exclusion of nano-sized cancers• Tiered definitions

Definition Maintenance

• Internal Model Calibration• More research (working parties etc)

Understanding the Risks

14 May 2014 48

Expressions of individual views by members of the Institute and Faculty of Actuaries and its staff are encouraged.

The views expressed in this presentation are those of the presenter.

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