Group Critical Illness Premium in the U.S. - Issue Age vs. Attained Age
Insurers continue to face challenges caused by the “hybridization” of group and worksite Critical Illness insurance products. A hybrid approach can be comprised of many different variations, each with its own unique risk profile. One of the more common trends today is the concept of issue age level premium rates on an optionally renewable group chassis.
But first, here is a brief summary of each premium model:
Both approaches have pros and cons that should be factored into product development, pricing, and the marketing approach. Some of the more relevant issues are:
- Attained age premiums have the advantage of a more affordable premium rate at the time of purchase as there is no “prefunding” for the insureds' older ages but the rates will increase steadily as the insured's risk increases. The increasing premium may make the coverage less affordable over time.
- Issue age premiums have the advantage of being constant and predictable for the insureds, but can adversely impact sales as they can be materially higher at the time of issue (due to the prefunding of later years premium).
Lapse Rates -
- Attained age premiums do not factor in lapse rates as the rates are intended to cover only the policies in-force in a given year.
- Issue age pricing needs to make assumptions for how many insureds will lapse each year as lapses can have a material impact on pricing. For most insurance products,the assumption is that some percentage of insured individuals will decide to discontinue their coverage each year. Initially, if too many people lapse their coverage the insurer may not recoup its acquisition costs (e.g.,commissions, set up and billing). Ultimately, if too many keep their coverage into the high-risk years the leveled premium may become insufficient.
Interest Rates -
- Attained age products require little if any assumption of interest as the insurer is generally being paid one month’s premium for that month’s risk. This model generally would not have an investment income component in its pricing.
- Issue age premiums are partially intended to offset (or pre-fund) the premium that insurers will need to charge the individual 10, 20 or even 40 years from issue. The extra premium paid in the early years is invested to help pay for the premium in later years. If the insurer overestimates the interest that will be earned (as many had done prior to the current low interest rate environment) it may materially impact the results for the insurer.
- Attained age pricing has little sensitivity to changes in morbidity (health) as the rates are only for the current year and fluctuations are minimal.
- Issue age products need to consider the likelihood that morbidity may fluctuate or trend differently than what is current at the time of pricing. Advances in diagnostics and treatment may substantially improve morbidity. Conversely, the increasing obesity epidemic in the U.S. and around the world may slow, or even reverse, the favorable trends that have been experienced over the past century.
Non-Renewal & Rate Management -
- Attained age agreements are generally written for a one year period and renewed annually. Should experience emerge different from pricing expectations, the insurer generally has the ability to quickly adjust rates or to non-renew the agreement.
- Issue age products implicitly (or explicitly) suggest a continuation of coverage. The prefunding of premiums today for future years suggests that the coverage is expected to remain in force. As such, it is unclear how the market and regulators will respond to rate changes or non-renewal of coverage.
Product Design -
- Attained age products permit the insurer to be more flexible with product design. Generally speaking, they are based on the “here and now." Insurers can offer features and provisions with greater certainty, and less concern, for the long term future as the protection is intended for a very limited period.
- Issue age products require greater consideration of the future as the rate structure has an implied period of continuance. As such, when considering benefits or provisions with minimal credibility, insurers should either apply additional margin or avoid them altogether.
The issues listed above represent just some of the many issues that should be taken into account when considering a hybrid approach to any health product. As to whether a company should develop an attained age or issue age Critical Illness product there is no right answer. That being said, the wrong answer would be to choose one of them without fully understanding the benefits and risks associated with each model.