Chapter 5-Income Protection Insurance Flashcards Preview

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Flashcards in Chapter 5-Income Protection Insurance Deck (17)
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1
Q

Discuss the customer needs met by income protection products

A

Main needs

Income replacement

+peace of mind (income stream while unable to earn)
+if state sickness/disability income insufficient
+employment benefits short term (employer continues to pay employee’s income)

Match loan servicing costs

+protection against inability to +meet major financial loans
+required by lender
may cover unemployment

Other needs

+​fund other insurance premiums
+Employers keen to pass on financial responsibility
+IP on professionals in practice (locum cover)

2
Q

List the key features of an IP contract

A

Replaces income
+would’ve earned if becomes unable to work due to accident/illness
+temporary annuity continuing until insured recovers/dies/annuity term ends, whichever comes first

May be commutable (to provide lump sum/ not generally the case)

Circumstances clearly defined for benefits to become payable/cease
+Not covered
unemployment, redundancy, early retirement, reluctance to return to work, some illnesses/physical injury e.g. HIV, attempted suicide

Benefits do not cease on claim
​cover still provided if recover and return to work

Level/increasing premiums/benefits
may be ​at fixed rate relative to sum assured

​No surrender/maturity value
+​sum at risk is very large compared to regular premium.
once expenses/expected claims taken into account, little surplus left to build asset share

Own/similar occupations

With profits/unit linked
​+mostly without profits basis, no benefit paid if claim is not made
+bonus builds up death/expiry benefit, so bonus doesn’t affect IP claims
+unit-linked policies may have a morbidity charge deducted from fund, with remaining unit fund at end of policy term paid as maturity benefit

3
Q

What kind of product variations are possible on IP contracts in terms of guarantees/reviewability of premiums?

A

Guaranteed/renewable premium rates

+full guarantee for full term of policy, expressed as level increasing/increasing according to specific index
+requires substantial loading (very long contracts, maybe high standard error for claims experience)
+higher reserves

No guarantee
+annual review
+comfort knowing premiums can be adjusted due to bad experience

+risks change
sickness that would’ve caused death, can now impair lives, leading to claims
terminal illnesses no longer terminal
+market pressures may limit premium increases
+selective lapsing, leading to portfolio with only poor lives left
+PRE: careful not to create expectations of no increases
+maximum increases
+uncertain future premium amounts

some guarantee
e.g guaranteed for first five years, with complete freedom review after

+Guaranteed insurability
+No Claims Discount

4
Q

What options may we find with respect to benefits/premiums on IP contracts in terms of escalation?

A

+May be subject to a cap

+Ideally
escalation rate < earnings inflation
+difficult to match too high escalation rate

+Escalation rates might be different in and out of claim (can lead to complex product design)

Benefit increase usually accompanied by premiums increase

+based on the current premium rate (rather than premium assumptions prevailing when original contract effected) required for additional cover at a given age (protects against adverse experience)

5
Q

What are some important points to bear in mind when setting claims definitions for IP contracts?

A

Claim definitions

+ Need to strike a balance between meeting needs/controlling insurance risk
+can be difficult to assess incapacity, ADLs are objective
+should be allowance for interpretation
+price charged for contract may differ for different risks represented by the claim definition

6
Q

What kind of claims definitions do we have for IP contracts?

A

Occupational based

+inability to perform own occupation (very expensive/greatest level of cover)
+inability to perform own/reasonable occupation
by education, status, training
+own occupation initially thereafter
+inability to perform any occupation
offered where occupations carry above average accident/health risk

Alternative incapacity criteria

+assessing impact of illness on insured’es ability to perform tasks required by an occupation or day-to-day life

+activities of daily living
physical activity (feeding, dressing, washing, toileting, mobility, transfer)
+mental capacity (overrides tests of physical incapacity
+functional assessment tests
+activities of daily working
+personal capability assessment

7
Q

What kind of benefit definitions might exist for IP contracts?

A

Replacement ratio (level of post-claim income to pre-claim income, net of taxes in both cases)

+easy to calculate
+tax impacts ratio (some regions do/don’t tax benefits)
+level indicates claim experience
as it influences incentive to return to work
+Require limits to ensure individuals have incentive to return to work

Maximum benefit specified
+in terms of salary at claim time
+in terms of state benefits

Benefits expressed as cash amount (requires annual review to check needs met)

Benefits in form of premium waivers
+waived when benefits are payable
+charged for by a small percentage addition to premium rate

Proportionate/rehabilitation benefits
+for those returning to work on part time basis/less strenuous/lower paid role
+benefits both insured/insurer
+recuperation needs (attractive to policyholders, doesn’t add sign cost)
+benefit relates to ratio (that gross earnings from new role bear to those from occupation against which disability was being claimed

+Benefit definitions mustn’t disinstinctive insured returning to work

8
Q

What is over-insurance in the context of IP contracts , and how might it arise?

A

When benefit is more than is needed e.g. a higher than appropriate replacement ratio

Over-insurance arises
\+from outset
\+subsequent to sale (salary not keeping up if benefits increase automatically on policy anniversary)
\+reduction in tax on IP claims
\+multiple policies
\+non-disclosed income
9
Q

How do we address over insurance in the context of IP contracts?

A

Appropriate maximum benefit

+max replacement ratio
+overall max benefit level
+deductions for other benefits example state benefits

+review benefit level appropriateness

+clear policy conditions highlighting what would occur at the claim stage

+financial underwriting

10
Q

Other policy definitions on IP contracts:

Waiting period

A

+specified period after policy start during which benefits won’t be paid
+reduce potential for anti-selection
+Uncommon now as anti-selection can be reduced through underwriting

11
Q

Deferred period definition and characteristics

Deferred period benefits

A

Deferred period

+Period of incapacity/sickness during which insured won’t pay benefits
+Split deferred period: eg pay half over for certain amount of weeks, full amount after
+Early notification (even before deferred period end so insurer can help with rehabilitation)

Deferred period benefits

+Integrate with employer-supplied benefits
+Reduce claim cost and therefore product price
+Reduce administration cost
+Reduce number of trivial claims
+meet customer needs: eg won’t want to claim for few days off for flue!

12
Q

Linked claims period

A

Waive deferred period if same sickness recurs within certain amount of time e.g. 26, or 52 weeks since last claim to encourage return to work

13
Q

Expiry age/term

A

+age at which benefits cease; often same as normal retirement age
+The term could also be fixed duration
+shorter premium paying period than policy term

14
Q

Briefly discuss group IP contracts (General)

A

+legal obligation eg some countries sick pay during first 2 weeks if sick

+The use of gross salary to provide benefits improves administration resulting cheaper (economies of scale) contracts

+smooth early retirement (when employee continuing in poor health)

+promote health (and ensure speedy return to work following operation)

15
Q

Briefly discuss group IP contracts (Benefits)

A

Benefits

+level (based on salary gross of tax, usually max 2/3 - 75%
+additional (pension contributions, state welfare contributions)
+in claim escalation

Continuation option

+allows employee of company to effect individual policy without providing evidence of health when he leaves service of employer
+possibly increase anti-selection

16
Q

What are the key risks to the insurer arising from selling IP contracts?

A

Rates (uncertainty because well defined claim criteria => more risk)

+claim inception rate (age, gender, smoking habits)
+claim termination rate (age, duration, gender, smoking habits)

Data
\+standard tables
\+advance in medicine
changes over time in opion
\+changes in nature of work
industry experience
\+mix of business
levels of benefits
\+terms and conditions
\+claims definitions
\+initial underwriting strength
\+claims underwriting
\+claims management

Anti-selection (significant for individual, reduced for group)

Withdrawals (selective withdrawals, negative asset share)

Moral hazard (robust policy condition/wording)

Lesser risks
mortality, expenses, investment

17
Q

What are the capital requirements typically found with IP contracts?

A

Lower than for other contracts

Frequency of premium
could be significant for single premium contracts

Contract Design
Reviewable charges and premiums will result in lower capital requirements

Initial expenses (acquisition/commission costs may be high due to complexity of the contract and heavy underwriting costs)

+Solvency capital requirement (due to difficulty predicting future morbidity)

+Lower than endowment/whole life, because there’s chance benefit never paid

+Reserving basis
prudence may need to be greater because difficult to predict sickness experience