Critical Illness Valuation
September 12, 2013| Von Steve Rowley
Region: North America
Once a Critical Illness product is developed and sold, insurers are required to complete valuation studies regularly to determine if their pricing assumptions are being met and if the product is sufficiently funded to pay all future claims. For this blog we’ve worked with Lin Lin, our Critical Illness valuation actuary, to discuss some of the unique aspects of individual Critical Illness valuation.
As with any insurance product there are numerous components to Critical Illness valuation studies. Some factors that present a more unique challenge to Critical Illness insurance are outlined below.
Claim Cost/Incidence: As discussed in Critical Illness Pricing, claim costs are derived from various population studies rather than actual insurance industry experience. As such, it is of utmost importance that the valuation actuary track actual-to-expected (A/E) experience as it emerges. This should be done for the experience in general as well as individually by benefit eligibility trigger.
Mortality Assumption: While many insurers continue to factor in mortality improvement, the majority of mortality improvements experienced in recent years are due to increased survival rates for individuals diagnosed with Cancer, Heart Attack and Stroke, leaving questions as to the actual benefit to Critical Illness insurers. As a result, any perceived benefit of mortality improvement may be erased, or even reversed, as a consequence of more people living to the ages where CI incidence rates have extremely high prevalence.
Voluntary Lapse Rates: As witnessed by the Long Term Care industry, changes in voluntary lapse rates can have a devastating impact on long-term results. Though Critical Illness insurance is less sensitive to lapse variations, it is important that products are priced based on informed judgment rather than any credible industry experience. As such, it is also extremely important to monitor variations closely so the insurer can respond in a timely manner should any rate activity be required.
Selection Factors: As discussed in our Critical Illness Underwriting blog, this product has a unique risk profile when compared to other life and health products. The pricing actuary makes certain assumptions about anti-selection and the protective value of underwriting - but these are largely developed utilizing best estimates, as few if any U.S. insurers have credible experience. When analyzing A/E experience, the valuation actuary needs to determine if variations in experience will likely continue into the future, or if it is simply the result of over/underestimating early selection factors. For instance, if early experience is 10% better than anticipated, does this mean that we can expect 10% better experience for the life of the product? Or simply that underwriting may have had more value than anticipated and we should simply “shift” our expected claim cost curve?
As a general rule, living benefit products are a challenge for insurers. Long Term Care, Disability Income and Cancer products have all had periods where their very existence was called into question. An understanding of the unique attributes of Critical Illness insurance and a comprehensive valuation process will provide the insurer with the timely experience analysis necessary to take corrective actions if needed.