QB5 pg 13 sol. 5.11

[rajashri]

Being a Stand-alone protection contract ,there is a great possibility of selection against the company .

my question is - kindly explain in what way there will be a great possibility of selection against the company .

pg 15 sol 5.13

There is also a " moral hazard " risk on both contracts associated with both the claim inception & termination rates . Some policyholders may wish to use the contract as a way of avoiding work .

my question is - kindly explain as to how way of aviding work will increase the sickness rates

is it that they are sick and do not return to work thereby incresing the sickness rate though actually it might not be the case .

 

[Steve McIntosh]

QA bank 5

Soln 5.11 Selection on stand-alone CI

This is in comparison with, say, an accelerated-CI product, which also has a death benefit. The argument is that there’s more chance that someone will take out a stand-alone policy because they think there are likely to get a critical illness. Why pay for the death benefit too if you are in this position? Also, many accelerated products are sold along with mortgages (so little risk of selection) whereas a stand-alone policy is more of a considered purchase.

Soln 5.13 Moral hazard / "avoiding work"

The fact there is a sickness benefit (particularly it is generous one) may discourage some claimants from returning to work. This would reduce the claim TERMINATION rates (and so increase overall claims costs).

In addition, the presence of a sickness benefit may encourage some workers to take time off work sick, whereas otherwise they might struggle on. If so, more sickness will last the deferred period, and so this would increase the claim inception rates.