Siu Yin Liu and Dr Winfried Heinen explain the findings of GeneralCologne Re's dread disease survey, and explain how product management and experience surveying help manage possible adverse developments.

In today's business environment, which in most countries is characterised by continuously increasing competition, life insurance companies have two options for positioning themselves in the market: either as a commodity supplier competing on price, or as a player in the more value-oriented market segments. Very few companies will be able to follow the first strategy, at least on a long-term basis; for the others, adding value for their customers by creating unique and innovative products is a natural alternative to consider.

With virtually the same options for reinsurers, GeneralCologne Re has chosen the value-added alternative and consequently has particularly focused on product management as a key area to deliver service to clients. Thus, over the last two decades, GeneralCologne Re together with its clients has introduced a variety of new covers in a number of markets.

However simply developing and launching the covers was not sufficient. In addition, since at the initial stage many pricing assumptions must often be made due to a lack of statistical data, the actual performance of these products has to be continuously monitored against those assumptions. Part of a product management service is therefore the ability to closely monitor the product after launch.

To illustrate this process, we have chosen the example of the dread disease or critical illness benefit, under which a lump sum is paid out to the policyholder on diagnosis of a serious disease (e.g. cancer or heart attack). This product was successfully introduced to South East Asia in the late 1980s, as well as a number of other markets throughout the world.

This article presents some of the key findings from GeneralCologne Re's survey of dread disease benefits in three Asian markets (Hong Kong, Malaysia and Singapore). From this, we will see what lessons may be drawn from the history of this product to date and what implications these hold for the future.

Dread disease survey 2000
The period covered by GeneralCologne Re's second survey of dread disease products and claims was through the end of 1997, with some 98% of the exposure relating to the five-year period 1993 to 1997. The scope of study covered the mainstream dread disease benefits only, so female-specific products, for example, were excluded. In Hong Kong, Malaysia and Singapore, the numbers of insurance companies that participated in the survey were 15, 10, and eight, respectively. Based on these companies' market shares, the study is estimated to cover well over 80% of each market; it provided an exposure of 2.9 million lives as of the end of 1997 and allowed the analysis of almost 7,000 claims.

Cause of claim
In agreement with experience that has been reported in various parts of the world, cancer was the most common cause of dread disease claims, making up 72% of all admitted claims (figure 1). Of the 9% of `other' claims, it is interesting to note that in Malaysia and Singapore several were due to benign brain tumour. This is quite unusual in any other territory where dread disease insurance is sold, and could be due to differences in the event definition and/or the approach to claims management.

A breakdown of cancer claims by site of occurrence gave the distribution in figure 2. This shows that cancers of the bone and connective tissue, skin and breast made up 36% of all cancer claims, a large component of which is cancer of the female breast. In fact, of all female cancer claims, over 40% were for cancer of the breast. In a typical insurance portfolio in the territories covered, where females make up around 50% of insured lives, one would therefore expect to find that almost 20% of dread disease claims were due to female breast cancer. From anecdotal evidence, the most important factor contributing to the high prevalence of breast cancer claims is anti-selection related to the inability of underwriting to detect high risk individuals. Applicants typically are asked for medical information concerning parents and siblings, and insurers never learn of strong family histories of breast cancer in more distant relatives that may affect the risk.

Incidence rates
Because there is only limited claims experience on the `additional type' dread disease benefit, this section focuses only on the incidence rates of the `acceleration type' benefit (where payment of a dread disease claim reduces the insured life's death cover). The graduated incidence rates in Figure 3 include death claims, i.e. they are for a benefit that pays out for either death or dread disease, whichever occurs first.

Mortality curves usually show rates for females that are lower than those for males across all ages. However, once the effect of providing dread disease coverage is added in, the likelihood of female claims increases to such an extent that claim rates are higher for females from the early 30s to the early 40s (figure 3). If the effect of mortality is taken out then we could expect the differential to be greater still. This is consistent with the shape of population cancer incidence rates (as noted earlier, cancer makes up the bulk of dread disease claims) where female rates might exceed male rates from the early 20s to the late 40s.

`Actual over expected' (A/E) analyses by various risk factors were also performed using graduated rates for death with dread disease acceleration as the `expected' rates. Two of the more interesting sets of results are provided in tables 1 and 2 opposite.

An analysis that was not published in the 2000 survey but which is noteworthy is the pattern of dread disease claims by calendar year (Figure 4). This shows an increasing trend over the period 1993 to 1997, with what appears to be a sudden increase from 1995 to 1996, culminating in an A/E ratio of 110% in 1997. It remains to be seen if this trend will continue.

Past and future lessons
Dread disease products have become an established component of insurers' portfolios worldwide. The two decades of their existence have seen countless alterations and a relentless expansion in the scope of coverage. Analysis of claims experience and cancer trends reveals certain areas that companies would be well-advised to note.

Shape of premium rates
We have seen that the incidence of dread disease claims is higher for females than for males over a range of ages that is especially important for insurance portfolios (Figure 3). Nevertheless, there are companies selling dread disease policies with rates that are lower for females than for males across all ages. In the agency-driven sales environment commonly found in Asia, this can still provide the company with a mix of business that provides satisfactory profitability, but it needs to be borne in mind that a change in the male/female portfolio mix could have a negative impact on results.

Definitions and exclusions
Population statistics show an increasing trend in prostate cancer, perhaps due to screening practices, that may in due course have a negative impact on an insurer's dread disease business as its portfolio ages. An added consideration to the obvious pricing implications is whether coverage should in fact be provided for all occurrences of prostate cancer, the reason being that some cases are not necessarily life-threatening nor as `dreadful' as many other forms of cancer. For this reason, GeneralCologne Re recommends that the definition of `cancer' exclude prostate cancers that are "histologically described as TNM Classification T1 or are of another equivalent or lesser classification." Other minor forms of cancer, e.g. some skin cancers, should also be excluded on the same principle.

Medical advances and trends
Population statistics are showing increasing trends in prostate cancer and female breast cancer. For prostate cancer, we have seen that policy definitions/exclusions can offer some protection to the insurance company. For breast cancer, however, exclusion cannot be justified, and current premium rates may not be adequate to cover a possible continuing deterioration in experience, especially in view of the fact that breast cancer currently accounts for almost 20% of all dread disease claims.

Other general risk factors include:

  • improved diagnostic techniques - it is now possible to diagnose `micro' medical events for three core conditions, micro strokes, micro carcinomas and micro heart attacks. Dread disease products were not priced to pay a benefit under such circumstances;

  • genetic tests - will insurance companies be allowed access to the results of genetic tests? Will consumers use them to anti-select against insurers?

    How can an insurer protect its financial position against such developments? Selling policies on premiums that are reviewable, or indeed specifying that contract definitions are themselves reviewable, would be an option.

    In Hong Kong, over 60% of companies have dread disease products with reviewable premiums. In Malaysia and Singapore, however, all but one of the companies surveyed guaranteed their rates. These guarantees could in some cases be on a whole-life basis. None of the companies surveyed had a clause within their contracts that would allow them to review their definitions should the need arise. In some cases such a review might be necessary, for example, if it became very easy to claim under one of the dread diseases (otherwise the pricing would have to allow for a 100% claim rate).

    Reviewability clauses for contract definitions have been introduced by some companies in Australia. In order to offer some comfort to policyholders that the clauses will not be abused, the wording indicates that the purpose of the reviewability clause is to ensure that the definitions:

  • remain appropriate with regard to medical terminology and classification;

  • take into account effective cures, vaccines and modern diagnostic procedures;

  • include diseases considered appropriate in the future; and

  • exclude diseases that have become minor.

    Dread disease survey 2002
    The above clearly demonstrates that close experience monitoring is necessary in order to detect and understand adverse developments, and then take appropriate measures to ensure the long-term profitability of innovative products. GeneralCologne Re is now in the process of conducting its third survey of dread disease products and claims in Asia. The topics covered will be similar to prior surveys, including an analysis of trends in claims experience and a discussion of recent medical developments that are relevant to dread disease products. It is anticipated that the report will be distributed to participating companies by the end of 2002.

    Reference 1 Droste T, Liu SY. Dread disease survey 2000: Hong Kong, Malaysia and Singapore. GeneralCologne Re.

    By Sin Yin Liu and Dr Winfried Heinen

    Siu Yin Liu is GeneralCologne Re's regional actuary Asia Pacific for property/casualty business. In her previous role as branch manager of GeneralCologne Re's life/health operation in Hong Kong she had undertaken projects such as a study of dread disease product design and claims experience in Asia. Dr Winfried Heinen is chief actuary for GeneralCologne Re's international life and health business.