Questions on Part I

Hi, I have a couple of questions on part I which I hope someone can help me with. Thanks.

Chapter 1

Page 6: I presume HIV is excluded under IP because of moral hazard risk. However it seems unlikely that someone, knowing that IP insurance is available, would risk getting infected with HIV purely because of it.

Page 21: Policies with some escalation in claims and no (or lower) escalation out of claim are slightly more popular – why? I can’t understand why such a policy would be useful to a policyholder or an insurer. For instance if one claims only after 15 years of a 20 year policy benefits will still be at the original and therefore insufficient level.

Page 23: Who bears the risk of fund implosion in a unit linked IP policy i.e. that the unit fund runs out before the policy term ends? Also are IP benefits paid out of the unit fund or from non-unit fund?

Page 27: Why is the scheme benefit based on salaries gross of tax? I would have thought net of tax income as a better proxy for the income the IP policy intends to replace on inability to work. Also why is the benefit as high as 90% of net pre-disability income when that under individual business is only about 60%?

Page 31: Why are accident and sickness policies not subject to underwriting? Also would such policies then have underwriting at the claims stage and include say a moratorium on pre-existing illnesses or exclusions say for accidents whilst engaged in a hazardous pursuit?

Page 32: Why are personal accident policies merely short term renewable? Is there no demand for a longer term policy?

Chapter 2

Page 4: Some insurers apparently allow the CI policy to be reinstated as a term assurance without further evidence of health. Isn’t there a huge risk of anti-selection here? The life is likely to be at a higher risk of dying after having suffered a critical illness and made a CI claim. Is the increased mortality risk priced into the original premiums?

Page 16 paragraph 2: Why would TPD cover on “own occupation” definition for higher risk categories be difficult to quantify?

Page 18: An example of a PCA is given in chapter 1 and an example of an FAT given here. What is the difference between a PCA and an FAT?

Chapter 3

Page 9 last paragraph: In the case where benefits are replicated would both CI lump sum benefit and LTC annuity benefits be paid or only one?

Page 17: I assume that even with the option of allowing the fund to be exhausted the minimum deferred period still applies and no deductions can be made during this time?

Chapter 6

Page 7 second bullet point: It states that a company may aim to write most of it’s business at standard premium rates – why?

Chapter 7

Page 16 second paragraph: What is a coverage notice?

Chapter 8

Page 5 second paragraph of core reading: Why would an insurer prefer high sum at risk over high premium as a source of profit? What is the difference?

 

Hi Niluki
Chapter 1
pg 6: I think the issue is more the fact that HIV infection may not be readily detectable at the underwriting stage, so somone who knows that they are a high risk (but not necessarily diagnosed) could take out IP - passing the u/w stages - and then claim later. So it's more an anti-selection risk, not moral hazard.

pg 21: The version with no escalation in claim would be a major issue for a long-term claimant - eg who received benefit for 20 years without that benefit ever increasing. So you can argue either way. It's not a major issue, though, as neither of these versions are common (compared with those that escalate in all states).

pg 23: Depends on the reviewability terms. If premiums (contributions) are reviewable, then the company will require an increase in contribution at the review date if there is any likelihood of negative units before the next review. If the policyholder doesn't comply, then the policy may be lapsed on the spot or at the future point at which the fund reaches zero, depending on the policy conditions. If the policyholder has complied with all reviews and it still goes to zero before the next review, then that's the company's problem until the next review. Of course, if all terms/premiums etc are guaranteed, then the risk of fund implosion is entirely borne by the company - but full guarantees are contradictory to the UL idea so are unlikely ever to be found.

pg 27: It's probably just a matter of practical convenience and for the avoidance of disputes: the net-of-tax calculation would have to take account of the members' actual tax rates, and these can differ between individuals due to other sources of income etc. Much easier to define as a % of gross salary, which is uncontestable. The "net" effect can be the same either way - as the CR basically says.

pg 31: It's actually saying that group versions are not normally underwritten - justification for this is the same as for group IP as described in the previous section of the notes.

pg 32: I'm sure there would be a demand - it's the uncertainty involved with a long-term version which would make it too expensive to sell, and/or too risky for the insurer to take on.

Chapter 2

pg 4: It would have to be!

pg 16: Not really sure - anyone else know? In any case, the main point is that the cost would be very high.

pg 18: There is very little difference. The distinction seems to arise in practice in their application - eg in the UK the tests that are applied in relation to claims for state benefits seem to be more commonly called PCAs, while those that are applied in relation to claims for insurance benefits seem to be more commonly called FATs. The distinction doesn't seem worth worrying about.

Chapter 3
pg 9: I think it would depend on the policy conditions. The contract might transfer benefit type from CI to LTC on reaching a certain age - so would only pay one type of claim - or it may pay twice - eg lump sum followed by an income. The premium would obvioulsy reflect this.

pg 17: The minimum period applies but is likely to be irrelevant, unless the unit fund is so small that it is entirely used up during this period. Drawing down money from units is like a partial surrender of units and essentially just spending the policyholder's own money - the insurer can't enforce a "deferred period" on this. The deferred period purely relates to payments of claim by the insurer - ie from the non-unit fund.

Chapter 6

pg 7 - because the alternative - charging special rates or imposing terms - causes bad feeling to the applicant and is a lot of hassle (expense) for the insurer. This would be a significant barrier to sales. If brokers got wind that a large majority of an insurer's applicants ended up being rated, then they would soon remove their custom.

Chapter 7

pg 16: These (I think) are notices/letters sent to the members (employees) informing them of what their cover is, and associated terms and conditions, when they join a group scheme. Basically, the point of the paragraph is that the broker will do quite a lot of the admin on behalf of the employer.

Chapter 8
pg 5: Basing remuneration on benefit has some similar, and some different, effects compared with basing on premium. It's similar in that the commission will generally increase with the size of policy, and as profits generally increase in absolute terms the bigger the policy, then this seems reasonable. The emphasis on policy size has a second effect, which is to encourage sales to younger lives. A premium-related commission would do the opposite. Provided it can be argued that younger policyholders generate more profit for the insurer than older ones, then this has some logic too.