Critical Illness Pricing 101
December 04, 2012| By Steve Rowley
Region: North America
In our prior Critical Illness blog entry we discussed some of the important factors to consider when developing a Critical Illness (CI) insurance product. For this blog entry I’ve worked closely with Cyriac Kottoor, our CI pricing actuary, to outline some of the challenges in pricing Critical Illness products today.
Pricing a CI product can be a daunting exercise. Unlike many other insurance products, there are no standardized industry tables and few carriers have any sort of credible claims experience. This leaves the actuary with the task of researching population incidence rates and estimating how this imperfect data lines up with how their company has chosen to define the various benefit eligibility triggers.
CI policies may cover a myriad of impairments throughout the globe, but at their core are always five key benefit eligibility triggers: Cancer (invasive), Heart Attack, Stroke, End Stage Renal Disease and Major Organ Transplant. The ability to develop suitable population statistics varies greatly among the various triggers. Cancer, for example, has a great deal of detailed data freely available through Surveillance Epidemiology and End Results (SEER). Stroke, on the other hand, has less comprehensive data (available through such sources such as Heart and Stroke Facts and Framingham Heart Study) that sometimes conflict and often need to be cobbled together. Even once core claim costs are developed, the actuary must wrestle with and factor in trends. Are incidence rates increasing? Decreasing? Are they likely to change as diagnostic procedures and treatments continue to improve?
Once the actuary has developed their core population incidence rates, the exercise becomes more subjective. Nearly all of the population data available is age-banded, forcing the actuary to "smooth" the curve across bands. Even this simple process can be a challenge when policies are renewable for life and most data sources lump all incidence above a certain age, normally 75 or 80, into one band. Additionally, one must determine if the data sources cover all occurrences, first occurrence only, or some combination thereof. Typically speaking, the data breaks down considerably beyond the first or second occurrence.
Now that the actuary has a suitable set of data on which to base his or her claim costs, it is time to work with the underwriters and medical directors to determine how closely these incidence rates fit the definitions developed for the policy. Adjustments will need to be made for such things as "Silent Heart Attacks," which would generally not be covered by a CI policy, or "Sudden Heart Attack Death," which may be significantly underreported in the population statistics.
Lastly, we need to adjust for the same criteria that most other types of insurance products factor into pricing, such as underwriting selection, interest rates, voluntary lapse rates, and the all-time favorite, Insured Population vs. General Population. Unfortunately, unlike Life Insurance, Disability Insurance and even Long Term Care insurance, there is minimal historical experience on which to base these assumptions other than what has occurred with other similar products across the industry and within your own company.
The important thing to keep in mind is that the developing and pricing of a CI product should be a collaboration across disciplines within the organization. The actuary must engage in active dialogue with the other members of the risk team throughout the process. With no industry tables or long term insured experience to rely upon, the actuary must work closely with the underwriters, product development team, claims and compliance to ensure that each aspect of the risk has been appropriately assessed and factored into the pricing.
Continue to check back for more blog entries that will walk through the continuum of Critical Illness insurance issues.