Although the debate around standardization of definitions and rising costs may have abated, reinsurers of critical illness insurance do suggest there may be some changes coming in product design that could benefit advisors and consumers, as well as boost product sales.

For example, program modifications to CI insurance policies could result in tiered payouts based on the severity of covered conditions, says Gary Mooney, vice president of Optimum Reassurance Inc. and president of actuarial and marketing firm Actel Resources Inc. Both are based in Toronto.

Mooney says that in Britain and South Africa, there exist “stratified definitions” for conditions such as heart attacks, whereby the payout can range from 10% to 100% of the face value of the policy. “Making payouts based on severity,” he says, “would make policies much more affordable.”

In fact, stratified payments are already being seen in Canada in some cases. For example, clients with ductal carcinoma in situ — a non-invasive cancer — may be eligible for a payout of a percentage of the face amount of their policies even if recovery occurs.

There has also been some concern that the number of conditions covered by CI insurance might be reduced, but that seems unlikely.

There are almost 30 illnesses covered today; when CI was first introduced in Canada, only five were covered. In fact, 97% of all CI claims are based on five conditions: heart attack, stroke, cancer, coronary artery bypass and multiple sclerosis.

In general, however, reinsurers do not have a problem with the increasing number of conditions covered by CI insurance. Micheline Dionne, senior vice president and chief actuary of Montreal-based RGA Life Reinsurance Co. of Canada, the newest reinsurer to enter the guaranteed space of the CI market, says that although costs go up with an increase in the number of covered conditions, the increase in price is not that significant for each additional condition, although the risk for reinsurers goes up.

But Helene Michaud, director of marketing at Munich Reinsurance Co. of Canada in Toronto, cautions: “An increase in the number of conditions typically means a more complex product for both advisors and consumers to understand, and it also puts upward pressure on the price. These factors create additional risk that could impair the long-term viability of this product.”

Closely linked to the number of covered conditions is the much debated issue of standardized definitions. (See page 41.) The fact that definitions of covered conditions vary widely from insurer to insurer is a source of confusion for advi-sors and consumers alike. It is apparent, however, that the industry is moving toward implementing uniform or “benchmark” definitions that will benefit all parties involved in CI insurance.

Dionne admits insurers have used definitions and covered conditions as a source of differentiation but that benchmark definitions will make the product easier to sell and will increase the comfort of consumers. Typically, insurance companies have had preferred definitions of specific illnesses, general conditions and exclusions.

GUARANTEED PREMIUMS

Another feature of CI policies that has been the subject of discussion in the past is guaranteed premiums. There is always the threat that reinsurers — facing higher payouts and increased legal risks because of earlier detection of covered conditions due to advances in diagnostic procedures and surgical methods — may be inclined to remove premium guarantees in order to lower costs and protect their bottom lines.

Although reinsurers agree that guaranteed premiums are a reality of the Canadian marketplace, there is always the subtext that that could change. “Advisors and consumers prefer rate-guaranteed products,” Michaud says. “So, it is doubtful that this option would disappear over the next few years. But there is also room for CI products offering adjustable rates if there is a need.”

Although Canadian market forces have influenced Munich Re to maintain its support for guaranteed products, the company has not been averse to non-guaranteed products. This position was elaborated upon in a 2001 report by Munich Re entitled Critical Illness, which states: “If experience shows the pricing bases are inadequate for a particular market, it will certainly be helpful to be able to adjust premium rates, even for business in force. For the same reason, coverage of the CI risk should be granted very restrictively in return for a single premium because in such cases adjustments on the premium or benefit side cannot be implemented.”

@page_break@But, Dionne reiterates, “Guar-anteed premiums are a reality of the Canadian market, and we expect it to remain that way.”

Typically, reinsurance companies insure the risks — wholly or partially — assumed by the insurance company or primary insurer that issues the CI policies or contracts.

Put simply, when an insurance company issues a policy, it is liable for all claims arising from the policy. However, the insurer spreads the risk associated with the policy by transferring all or part of it to one or more reinsurers. When a claim is made, the primary insurer settles it with the client and then recovers the corresponding amount — all or a predetermined portion — from the reinsurer. The reinsurer receives a premium from the primary insurer commensurate with the risk assumed.

Primary insurers transfer their risk to reinsurance companies because that allows them to increase the amount of insurance coverage they can issue in a particular category without overextending themselves, given regulated reserve or surplus limitations. In other words, by using reinsurance, the primary insurer reduces its risk exposure to and financial liability for potential claims.

The challenges faced by reinsurers of CI insurance flow from the fact that they generally rely on historical claims data for pricing. Given that CI is a relatively new product — first launched in South Africa in 1983 and in Canada 10 years later — there is insufficient claims experience to draw on, exposing reinsurers to potentially higher risks.

But, says Optimum Re’s Mooney, the actual experience of reinsurers of CI insurance is close to what was expected. He does not anticipate “any major price increases for now” and says that product coverage and underwriting issues are “all settling down.” IE