Chapter 1 - 4: Health ins prods - Important overview

Question 1

State 3 basic aspects insurers need to consider when selling insurance products to customers (3)

Others (6)

Answer 1

• Customer needs
• Risks to insurer
• Capital requirements

There are various other factors too e.g.

• nature of market
• competitiveness
• requirements from providers of capital
• regulation/legislation
• distirbution channels
• existing business model, etc

These will be touched on later in the course

Question 2

Comment on the considerations an insurer will make when deciding on which products to sell in terms of:

• customer needs (2)
• risks to the insurer (3)
• capital requirements (5)

Answer 2

• Customer needs
  
  • Protection
    
    • protect customers (or their dependants)
    • from consequences of unwelcom events
  • Savings
    
    • investments, build funds for specific reason
      
      • retirement
      • repay loan
    • investments, building up funds for discretionary reasons
      
      • uses as sees fit when need arises
      • • Risks to insurer
  • Micro risks: higher deaths than expected=> losses
  • Macro risks: insurer insolvency
  • Risks varying by contract
• Capital requirements
  
  • Capital recoupment
    
    • Contract design: prefer contracts which recoup faster
    • Supervisory regs
  • New business strain
    
    • Init costs + reserve + cap reqmnts> premium income

Question 3

What kind of customer needs might exist for customers at different age groups?

16 - 25 (4,4)

25 - 35 (5,4)

35 - 65 (4,4)

65+ (4,3)

Answer 3

• 16 -25 of age
  
  • likely situation
    
    • higher education/fist job, partner or not, probably no home, probably no dependants
  • needs
    
    • support from parents, saving towards family needs, like to spend money if possible (lol, what money?)
• 25 - 35 of age
  
  • likely situation
    
    • maybe partners/children, large debts, moderate income, high expenditure, often not much wealth
  • needs
    
    • loans, risk protection, maybe saving, some retirement saving
• 35 - 65 of age
  
  • likely situation
    
    • children become independant, debts reduce, income may increase, redundancy periods may occur
  • needs
    
    • retirement savings, risk protection, wealth transfer, disposable income investment
• 65+ of age
  
  • likely situation
    
    • employment into retirement, few debts, much lower income, more accumulated wealth
  • needs
    
    • risk protection, disposable income investment
    • wealth transfer

Question 4

Briefly list the product cycle that insurance companies (typically) work according to (8)

Answer 4

1. Product design
2. Pricing
3. Administration
4. Marketing sales
5. Claims management
6. Experience monitoring
7. Valuation

Question 5

Product Cycle:

What does product design need to consider? (4)

Answer 5

1. The needs of customers
2. Roles of stakeholders
3. Cover provided and premiums
4. Risks involved in providing health insurance
5. Distribution channels used

Question 6

Product cycle:

Pricing considerations to be considered (2)

Answer 6

1. Experience may vary widely by provider.
2. Stricter claims underwriting should be reflected with lower premiums.

Question 7

Product cycle:

Administration (2)

Answer 7

1. Maintaining policy data
2. Whether systems cope with design complexity

Question 8

Product cycle:

Marketing and sales (2)

Answer 8

• This product may be seen as a genuine need by customers.
• However, the product may still need to be marketed to maintain a competitive position in the market.

Question 9

Product cycle:

Claims management and underwriting (7)

Answer 9

• Factors such as
  
  • underwriting
    
    • at inception
    • claims stage - complication for recurring claims/benefit pmts
  • waiting periods and
  • claims management..
• …have a fundamental implications for the
  
  • how easy it is to sell the product
  • claims experience and subsequently premium rates.

Question 10

Product cycle:

Experience monitoring and valuation (7)

Answer 10

• Premiums are usually reviewed annually
• It’s important that
  
  • the info used for this is up to date as it influences
    
    • sales, prod design, claims mngmnt, assumptions (pricing/valuations)
  • data: adequately gathered, stored and sufficient to facilitate analysis
• National or industry statistics on treatment costs covered by PMI products will not be applicable to the customers of individual insurance provider. Hence monitoring is important part of premium rating.
• Valuation are a regulatory requirement to determing/and influence
  
  • policyholder liabilities, capital requirements, impact of/on reserves

Question 11

Briefly describe group products in a life insurance context

Definition (1)

Situations arising in (5)

Characteristics (6)

Answer 11

• Single policy, covering number of individuals
• Arises where
  
  • employer pays whole premium on behalf of emplyees
  • employer pays part/whole premium, but member must pay for coverage on children/spouse
  • employer merely facilitates
  • groups linked to a club
• Characteristics
  
  • often short term
  • regularly renewable
  • premiumd depends on
    
    • number of individuals
    • characteristics of individuals
    • claims experience (experience rating)

Question 12

Subject F102 covers various life/health insurance products.

When describing these products, there are key broad characteristics which should be known well. What are these characteristics?

(6 broad groups, with subpoints)

(Note, although this is covered in F102, it may be a useful framework with which to consider the products in F101)

Answer 12

1. Customer needs met
   
   • savings, protection, accumulation
2. Product features
   
   • benefits given (claim amount, etc)
   • 3. Product forms
   • conventional, with profit, unit linked, index linked
3. Risks to insurer
   
   • Investment, expenses, mortality, morbidity, persistency, selective lapses, anti-selection, moral hazard
   • Overall risks
     
     • financial: business, liquidity, credit, market
     • non-financial: operational, external
   • Aggregation/accumulation of risk
4. Capital requirements
   
   • initial expenses and new business strain
   • asset share and withdrawal risk compared to asset share
   • 6. Group vs individual
   • whether a group version of the contract exists or not

Question 13

What key features apply to health insurance products? (7)

Answer 13

1. Clear relationship between health risk and age
2. Underwriting plays an extremely important roles (initial and claims)
3. Claim events are not as clear cut as with other categories of life contingent cover
4. Waiting periods are prevalent (or “moratorium underwriting”)
5. Products are typically without profits or unit linked
6. By and large protection products thus surrenders are not important
7. Group versions of products have significant market share – why is this?

Question 14

Health insurance contracts can be split into short term contracts and long term contracts.

What are the key characteristics of short term contracts? (5)

Give examples of key short term health insruance contracts

Answer 14

Key features of short term health insurance contracts

1. Indemnity based (usually)
2. 1 year renewable contracts
3. Unknown and volatile claim amounts
4. ultiple claims
5. Delays in reporting and settling claims (except PMI)

Examples of key short term health insurance contracts

1. Private medical insurance (PMI)
2. Major medical expenses (MME) cover
3. Hospital cash plans

Question 15

Health insurance contracts can be split into short term contracts and long term contracts.

What are the key characteristics of long term contracts? (2)

Give examples of key long term health insruance contracts

Answer 15

Key features of short term health insurance contracts

1. Single claim amount
2. Claim amount may be known

Examples of key short term health insurance contracts

1. Crirtical ilness (CI) cover
2. Long term care insurance (LTCI)

Question 16

Give a very brief description of the following health insurance contracts, which form the key products covered in this subject:

PMI (Private medical insurance) (5)

CI (Critical ilness cover) (2)

LTCI (Long term care insurance) (1)

Answer 16

Private Medical Insurance (PMI):

• indemnity for cost of private medical treatment.
• also hospital cash plans that pay fixed amount per day in hospital.
• short term; usually 1 year renewable
• other short term products include: major medical expenses and health cash plans.
• in SA, indemnity cover can only be provided by medical schemes (mutual funds) and fixed sum is provided by insurers for PMI

Critical Illness (CI):

• pure protection that pays out on one of insured conditions.
• long term

Long-term Care Insurance (LTCI):

• pays continuing personal/nursing/domestic care for elderly

Question 17

The following flashcard comapers the significant differences between PMI, CI, and LTCI in tabular format, by considering

• whether cash or indemnity benefits are provided
• whether the product supports a single claim or multiple claims
• whether benefits are provided in either a lump sum or stream of pmts

Can you recall the table?

Answer 17

Indemnity vs. Cash

• PMI: cash (SA health insure.); indemnity (SA med schemes)
• Critical Illness: cash
• Long Term Care: cash or indemnity

Multiple claims vs.Single claims

• PMI: Multiple claims permitted
• CI: usually single claims; maybe tiered/accelerated death ben)
• LTCI: Single claims (expected not to recover)

Annuity benefits vs. Lump sum benefits

• PMI: Lump Sum
• CI: Lump Sum
• LTCI: Can be either or mix

Question 18

Personal accident cover: risk and rating factor

What is a risk factors? (1)

What is a rating factor? (2)

Answer 18

Difference between a risk factor and rating factor

• Risk factors are factors that are known or suspected to affect claims cost
• A rating factor is used to determine premium; rating factors are proxies to risk factors

Question 19

Define ‘new business strain’ in words (4)

Answer 19

Ne business strain in words:

• Premium paid at start of contract,
• less initial expenses including commission payments,
• isn’t enough to cover required solvency capital
• that company needs to set up at that point.

Question 20

Define ‘new business strain’ as a formula

Answer 20

New business strain as a formula:

NBS = V₀₊ + E₀₊ - P₀₊

Where:

V_{0+ =} sup reserv + solv cap at time 0+

E_{0+ =} expenses + commission inccured time 0+

P_{0+ =} premium paid time 0+

Question 21

Define anti-selection (2)

Answer 21

• People being more likely to purchase insurance when they beleive their risk is higher than insurer has allowed for in premiums/pricing.
• Also arises with options/guarantees: those most likely to gain will most likely exercise.

Question 22

List and discuss 5 factors that influence the capital requirements of a life insurance product

Answer 22

Accronym: FISCR

Five Issues Surrounding Capital Requirements

1. Frequency of premium pmts
   
   • more upfront = less capital intensive
2. Initial expenses
   
   • higher initial expenses increase capital requirement if premium doesn’t increase
3. Solvency capital requirements
   
   • need assets to cover supervisory and required solvency capital
4. Contract design
   
   • whether contract design allows reserves/solvency margin to remain low
   • lower initial reseves = lower initial capital requirement
   • slower increase in reserves over contract term, faster invested capital is release
5. Reserving basis (level of prudence)
   
   • reserving basis stronger, requires more capital than would be required under pricing basis

Question 23

Describe briefly the factors an insurer should consider when choosing the range of products to sell (4)

Answer 23

1. Offer range of attractive products, maximising profits
2. In long run, profits will be maximised when utility of products to consumers is also maximised
3. Insurer should take on profitable risks within its available capital, to maximise economies of scale
4. Insurer shoud diversify/control overall risks wherever possible, using appropriate volume and mix of suitably designed contracts.