Claims are a good thing. The insurance industry exists to pay them and the typical claims philosophy...
Claims are a good thing. The insurance industry exists to pay them and the typical claims philosophy will refer to the need for all 'valid claims' to be paid promptly.
In most circumstances 'valid claims' will also be those that were allowed for by the actuary when pricing a product. However, it is essential that there is close liaison between the claims and actuarial disciplines at all times and particularly during the product development phase to ensure that opportunities for dispute are kept to a minimum.
The problem for insurers comes not from expected claims but from unexpected claims, the source of which includes:
lŠUnclear policy wording
lŠInsurance Ombudsman rulings
Some of these factors are more controllable than others.
For example crystal clear policy conditions, combined with well trained and knowledgeable sales intermediaries will help keep misunderstandings to a minimum. However, difficulties can still arise as we have seen with permanent total disability (PTD) benefits and income protection insurance.
For PTD, there have been far too many declined claims reflecting the subjective nature of occupation-based definitions and the need for disability to be permanent. Insurers have tried to improve matters by redefining PTD disability to be less subjective and we now have definitions based not only on occupation but also on activities of daily work (ADWs).
Meanwhile, for income protection ombudsman rulings have suggested that an 'any occupation' definition for disability will be considered to be nearer to 'own occupation' than was originally intended by the industry. This has resulted in cover on this basis now being offered on terms much closer to 'own occupation'.
But the factors that are most difficult to control are the external social and environmental risks such as medical advances and new diseases. By their very nature these will be unknown quantities at the time a policy is developed.
We need look no further than the advent of Aids in the 1980s for a prime example of a new disease and how the insurance industry reacted.
The reaction was indeed swift and included a significant increase in life premiums for new business and the removal of guaranteed insurability options.
IP conditions were changed so that a claim from Aids would be excluded. Insurers also had to increase reserves for in force policies if the premiums were guaranteed. Policies with reviewable premiums were less of a problem as these could be increased if necessary.
Fortunately Aids has been less of a problem than originally predicted in the UK and premiums have reduced significantly, as the trend in term insurance premiums over the last few years clearly demonstrates.
Another example of how the degree of risk can change over time is IP cover for teachers, where premium rating is now based on a more expensive occupation class due to poor claims experience. The main cause of these claims tends to be stress, another modern 'disease' not specifically factored into the price.
For critical illness (CI) there has been concern in the CI market recently over prostate cancer and angioplasty which have, as yet, not impacted on product design.
Prostate cancer is one of the many forms of cancer that is covered under the cancer definition. However, it is a very common cancer in males. It is believed that as many as one in seven men aged 40 have prostate cancer and most men over the age of 80.
The potential problem for insurers is the increasing availability of improved and more sensitive diagnostic techniques. These techniques involve the detection of increased levels of Prostate Specific Antigen (PSA) in the blood and may lead to an increase in the early detection of prostate cancer. The fact that this test is cheap and readily available means it could have an impact on premiums. As yet the test is not sensitive enough to detect the very small cancers identified by the research leading to the findings above. However, it highlights the need to keep the situation under investigation and consider the possible impact on product design.
In recent years the number of angioplasty operations taking place have increased by over 10% a year. These procedures are relatively simple, can be performed in a day and are much cheaper than a cornary artery bypass graft. The incidence in the UK is nowhere near the US where operations are recommended almost as a matter of course in the fight against heart disease and this suggests that the number of procedures will continue to increase.
However, many of the definitions used in the market require surgery to be performed on at least two arteries and this procedure is less frequent. To this extent there is a cushion. There is however, the danger that in future multiple artery surgery will become the norm as a preventative measure. Any saving in premium rates from reduced heart attack incidence could be more than compensated by increased claims under the surgery definitions.
Finally, random fluctuations are to be expected in the amount of claims in any portfolio. Paradoxically this happens as part of the normal process of statistical variation. It would be expected that claims in some years will be slightly higher than average but that this would be balanced overall by lower than expected claims in other years. The important point is to continuously monitor experience to ensure that the actual variation falls within given limits and does not represent a shift in the underlying expectation.
Handling the unknown
So how does the insurance industry deal with the unknown&qu
Two global vehicles
'Further plug advice gap'
Must appoint separate CEOs and boards
Advisers do come out well
Will report to Mark Till