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Sep 2007 Paper 1 Q 7 (iii)

S

ST6_aspirant

Member
This part of the question asks why will results of the critical illness claims investigation not be indicative of future experience. One of the reasons is that there might have been a change in the definition of critical illness or the critical illness(es) covered. Just want to make sure that it is talking about the definition for pricing a new product, since it should be possible to change it for an existing product. Thus, it is relevant only when we are looking to price a new product. Thanks.
 
Hi - you are correct that the definition of CI cover should not be changed for an existing contract (assuming that you meant to include a "not" in your sentence!). But the question isn't specifically asking about pricing a new product, it is asking about why the future experience (including that arising under policies that have already been written - not just future new business) may not be the same as the past experience since the product was initially launched.

If the definitions of CI (or the types of CI being covered) have changed during the period of the investigation (i.e. between launch and now) then this will distort the historic experience and make it less relevant for the future. The investigation could be performed separately for different tranches of business, split according to when the definitions changed, but this could well result in having too low a volume of claims for each "cell" of the investigation and hence lack credibility.

Hope that helps.
 
Yes, I missed the critical "not" there. Understood,

Also, just realised that the most likely course of action in case the need arises to change the CI definition might be to review the premiums and change them, if they are are reviewable as per contract terms and conditions, which can then become the factor for splitting the "cells", i.e. when the premiums changed, because a policyholder might want all the benefits to be as he signed up for.
 
I'm not sure that this is quite right: the policyholder will always want the benefits that he/she signed up for (not just "might want").

The most likely scenario in which the CI definitions and/or number of CI illnesses covered changes are for a tranche of new business (i.e. a product relaunch) rather than under a reviewable product. (The latter is where the premium rate can be amended to allow for changes in the insurance company's expectation of future claim rates.)

Changes to the critical illnesses covered by new policies tend to occur due to medical advances, which affect what type of condition is considered to be "critical". Public perception can also have an impact: a company may decide to add a condition which has received recent strong media attention in order to increase the marketability of the product.

What is most important here in relation to this question is that you shouldn't assume that future claim rates on a policy will be the same as past claim rates on a policy, if the current and past policies covered different types of critical illness.
 
Can we not then change the premium rates because the expectation of future claim rate has changed and that has changed due to the reasons you mentioned, i.e. medical advances, which will mean that a condition is no longer critical and hence lowering the premium is is in fact in line with the newer products in competition, assuming no further new diseases are uncovered by both competition and insurer. Or covering a new condition ex swine flu that has received media attention and is wide-spreading.
 
Hi

Adding or removing critical illnesses from the list of coverage would be a change to the terms and conditions of the policy. Hence it is more likely to be done for brand new business only, rather than for existing business (even with reviewable premiums). Bear in mind that CI policies are written not to pay out on diagnosis of any critical illness, but on diagnosis of any of the illnesses which are specified within the contract wording for that particular product.

So, for example, if the insurance company chose to add in one or more new critical illnesses to an in-force product and asked the existing policyholders to pay a higher premium as a result, this may not be considered to be fair. The policyholders might not want the coverage for those extra illnesses and so would feel unhappy that they were being expected to pay more for them - particularly when this is not what they had signed up for when they took out the original contract.

And if the insurance company chose to take away one of the critical illnesses from the list of covered conditions for an existing policyholder, they might become very unhappy if they then were diagnosed with that illness and the company would not pay out, despite their original policy document saying that this illness was indeed covered.

For reviewable premium business, it is normally the case that the premiums can only be increased due to a change in expectation of future claim rates for the cover as it is defined within the existing policy.

Hope that makes a little more sense?
 
That makes sense, thank you for this detailed discussion! :)
 
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