Critical Illness –
Lessons to Learn from UK Market
10th Global Conference of Actuaries
7-8th February 2008
Mumbai, India
SUNIL SHARMA, MSc, FIA, FASI
Swiss Re Europe SA,
UK Branch
Agenda
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South Africa: where it all began
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Why is it sold/bought

UK – The beginning

UK – The early Years
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Concerns by 2002

The market challenge
10th Global Conference of
Actuaries
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Swiss Re research
7-8th February 2008
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Where do we go from here?

Lessons to Learn
Mumbai, India
Slide 2
South Africa: where it all began
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 3
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Originated in 1983
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Acceleration of 25% of death benefit, limited to (around)
USD 25,000

Guaranteed premiums

Limited to heart attack, stroke, cancer, CABG

Strong insurance need
Why is it sold / bought?
10th Global Conference of
Actuaries
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Cost of medical treatment (as in SA)
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Loss of earnings (substitute for loss of income cover)
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Debt repayment
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Housekeeping / childcare
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Modifications to home, car, workplace etc..
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Rehabilitation / recuperation

etc…
7-8th February 2008
Mumbai, India
Slide 4
Critical Illness in the UK
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 5
UK: In the beginning

First product launched in mid-1980’s
Product covered 7 core conditions: Cancer, heart attack,
stroke, CABG, kidney failure and organ transplants
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10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 6
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TPD was included as a sweep-up

Offices had their own definitions

Product sold through direct sales force
UK: The early years

In 1990’s, IFA share of market started growing
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List of diseases started to grow
Most products covered more than 30; many not meeting
needs or added little or no benefit

Bancassurer entered market; CI included in mortgage
benefit package

10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 7
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First standard definitions issued in April 1999
UK: The early years

In 1990’s, IFA share of market started growing

List of diseases started to grow
Most products covered more than 30; many not meeting
needs or added little or no benefit
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10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 8
First standard definitions issued in April 1999
UK: History in Numbers
Sale Volume Trends
120
110
100
90
80
70
60
Slide 9
Protection Premium Trends
Life Premium
Gtd CI Premium
R CI Premium
UK: Concerns by 2002

Poor depth of underwriting
– Short application forms not capturing all risk factors
– Low levels of retention = low investment by companies
in underwriting staff and processes
– High proportion of applications accepted on standard
terms
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 10
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Concerns over medical advances
– e.g. PSA testing detecting prostate cancer
– large number of diseases increases uncertainty in
projecting costs
UK: Concerns by 2002
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General trend of under pricing
– longer than anticipated delays = inadequate IBNR
adjustments
– poor data quality
– volatile claims experience = uncertainty regarding cost

Other concerns
10th Global Conference of
Actuaries
– Evidence of anti-selection
7-8th February 2008
– TPD claims management concerns
Mumbai, India
– Definition drift, i.e. paying unintended claims
Slide 11
UK: Resulting actions
Given the concerns, a number of reinsurers withdrew
from the guaranteed CI market


This resulted in:
– a reduction in capacity/increase in prices
– an opportunity to improve the risk controls
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 12
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ABI definitions
– Worries about PSA testing led to stage 1 prostate
cancers being excluded
UK: Resulting actions

Product changes
– Number of diseases reduced to +/- 25
– In particular, angioplasty was removed; number of
operations was increasing by 10% p.a.
– Cover ceased at age 65
– Some options were removed
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Partnerships between reinsurers and clients
10th Global Conference of
Actuaries
– More detailed application forms + clearer questions
7-8th February 2008
– Strengthen underwriting and claims procedures
Mumbai, India
Slide 13
UK: Resulting actions

Pricing
– Following changes, claims experience more stable
– Swiss Re helped clients to analyse their experience
– In-depth analysis of historical trends
– Long settlement delays  adequate IBNR adjustments
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Anti-selection
10th Global Conference of
Actuaries
– Higher proportion of substandard lives rated/declined
7-8th February 2008
– Also dealt with through non-disclosure
Mumbai, India
– Application form asks for other policies to be disclosed
Slide 14
Declined claims:
a multi-layered issue
Total claims declined = 23%
Declined for not meeting definition = 11%
Typical office writing new business
What can we do to reduce declined claims?

Increased education
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Screen and assess claim enquiries
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Consider scope of coverage

Tiered benefits
Declined for non-disclosure = 12%
Non-linked non-disclosure = 6% (Est)
What can we do to reduce non-disclosure?
Slide 15
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Improve proposal forms

Distribution monitoring

Simplified / tele underwriting
Can we change how we deal with non-disclosure?

Retrospective medical evidence on all lives

Change philosophy to pay non-linked claims
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Amend definition of non-disclosure

Non-contestability clause
Non-disclosure in the UK
Anti-selection is largely dealt with by obtaining GP report at claims
stage


Non-disclosure could void the claim. ABI splits non-disclosure into:
– Fraudulent
VOID
– Clearly Reckless
VOID
– Inadvertent & Linked
DEPENDS
– Inadvertent & Non-linked
DEPENDS
– Innocent
PAY
Some companies have started to publish their declinature rates = +/20%, 50% of these due to non-disclosure
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10th Global Conference of
Actuaries

7-8th February 2008

Mumbai, India
Slide 16
This has damaged people’s trust in CI
Law Commission looking into non-disclosure; considering introducing
non-contestability after 3 years for anything not fraudulent
What next?
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Where to go next?

Since 1986 Industry has just tweaked product
– add definitions / broaden definitions
– play the “Aequos game”
– service / underwriting

Market has reached a point where
– run out of easy value-add illnesses
10th
Global Conference of
Actuaries
7-8th
February 2008
Mumbai, India
– affordability stretched
– product being sold where not intended
– some negative press…
- declinature rates, non-disclosure, complexity..
Slide 18
How to solve the CI problem?
Current issues:
10th Global Conference of
Actuaries
7-8th February 2008
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Affordability
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Adverse publicity arising from
declined claims
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Lack of consumer confidence

Elements of IP may be a better fit

Complying with TCF guidelines

Differing views on the future between advisers and
providers (and amongst providers!)
Stagnating sales volumes
Mumbai, India
Slide 19
Swiss Re research
Quantitative
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All significant UK product providers

Over 100 RIs from distributor firms
Qualitative
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10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 20
IFA focus group
Challenges from the research
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 21
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Whilst price is important – distributors have little
appetite to see impairments reduced

Many conflicting messages – how should market
proceed?

Will product ‘tweaks’, e.g. adding conditions, introducing
instalment payments or tiered benefits, actually grow the
market?
Swiss Re CI survey:
is it any wonder we struggle to
innovate?
“Broaden cover”
“Decline fewer claims!”
“Make more affordable”
“Reduce complexity”
“Bring in more illnesses and layers
of cover”
“Reduce cost”
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 22
“Companies should be more
innovative”
“Standardisation is really
important”
“Add illnesses that add value…”
“….but that will not increase the
cost of the product”
Innovation: Tele-underwriting in the
UK
A number of companies are starting to use teleunderwriting

Medical professional, e.g. nurse, phone applicant on
receiving application form

Aim is to extract better/more information through open
and repeated questions

Applicant more likely to disclose relevant information to
medical person during an informal chat

10th Global Conference of
Actuaries
7-8th
February 2008
Mumbai, India
Slide 23
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Stops salesmen interpreting questions
Should reduce the number non-disclosures, but
probably won’t stop fraud
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Summary
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Product was very successful in the UK…

But intense competition created some cracks

Tight risk management controls and new ABI definitions
were implemented

Value of many elements of the cover can be questioned

Definitions never perfect – and need to be regularly
examined and updated

Consumer understanding an issue
10th Global Conference of
Actuaries
7-8th February 2008
Mumbai, India
Slide 24
Critical Illness – some lessons to learn from UK

Beware of definition drift

Don’t play the “Aequos game”

Good application form design coupled with sales training
for agents can improve :
– non-disclosure
– underwriting and
– experience
10th Global Conference of
Actuaries
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Clarity for consumers can improve claims processes
7-8th February 2008
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Definitions based on detection of disease can be a major
concern
Mumbai, India
Slide 25
Critical Illness –
Lessons to Learn from UK Market
Discussion
SUNIL SHARMA, MSc, FIA, FASI
Swiss Re Europe SA,
UK Branch