Critical illness should address lifestyle needs

01 August 2008 Dr John Schoonbee, RGA Reinsurance

As a result of the complexity of products, marketing pressure as well as medical advances, Critical Illness (CI) or dread disease products could have a questionable relationship with insurable interest.

In some CI cases, an individual diagnosed with an extremely mild form of multiple sclerosis or undergoing bypass surgery gets paid out the same as someone who becomes a quadriplegic. In the same way, certain cancers that have very poor survival rates result in the same pay-out as cancers that have a very high rate of treatment success.

This is much akin to someone who has one room with fire damage and someone whose whole house burns down, but both get paid out for the replacement cost of the whole house. The result is someone getting what in essence is a windfall insurance pay-out.

Maintaining fair value

CI products are therefore often not well-correlated in terms of the insured's ability to continue working, cover medical costs and compensate for loss of insurability, with a pay-out generally linked to the diagnosis of a condition or following an event, regardless of severity. In order to maintain a link to fair value, the industry should address this approach by continuing to develop CI products, as certain formerly terminal illnesses are now treatable as chronic diseases, and previously debilitating conditions can often be cured or more effectively treated.

This means that there is often no loss of income due to an inability to work, nor is there a notable decrease in the quality of the individual's life, therefore a full sum-assured CI pay-out is not necessitated.

Product definitions

With CI products as they currently exist, product definitions need to pre-empt the impact of the disease(s) by focusing on the CI definition wording or by attempting to assess the impact using severity levels of a disease.

Product definitions address the issue to some degree, but there are still many inconsistencies as people not only respond differently to the same event, but due to differing lifestyles, life stages, and age, the impact of the same illness can be devastating to one person but considerably less harmful to another.

Next evolution

The next evolution in CI could require the industry to begin considering factors other than simply the clinical severity of events. This approach means that the focus might shift to the lifestyle impact of the event, ensuring that the associated cost issues in terms of income continuation, over-run medical bills, advanced medical treatment, and managing any possible loss of insurability are covered rather than merely paying out a lump sum on diagnosis.

One size does not fit all

While paying on the clinical severity of the need is objective, CI should look to the individual needs of a person following an event. Consideration needs to be given to exactly what amount is required by the individual after an event and should vary in relation to the severity, as each case is different. Heart attacks for example occur with varying percentages of infarction, burn victims have varying degrees and severity of burns and paralysis can occur leaving someone with differing degrees of mobility. With this is mind, there is no one-amount-fits-all solution to CI.

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