1. Critical Illness – Lessons to Learn from UK Market 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India SUNIL SHARMA, MSc, FIA, FASI Swiss Re Europe SA, UK Branch

2. Slide 2 Agenda South Africa: where it all began Why is it sold/bought UK – The beginning UK – The early Years Concerns by 2002 The market challenge Swiss Re research Where do we go from here? Lessons to Learn 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

3. Slide 3 South Africa: where it all began Originated in 1983 Acceleration of 25% of death benefit, limited to (around) USD 25,000 Guaranteed premiums Limited to heart attack, stroke, cancer, CABG Strong insurance need 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

4. Slide 4 Why is it sold / bought? Cost of medical treatment (as in SA) Loss of earnings (substitute for loss of income cover) Debt repayment Housekeeping / childcare Modifications to home, car, workplace etc.. Rehabilitation / recuperation etc… 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

5. Slide 5 Critical Illness in the UK 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

6. Slide 6 UK: In the beginning First product launched in mid-1980’s Product covered 7 core conditions: Cancer, heart attack, stroke, CABG, kidney failure and organ transplants TPD was included as a sweep-up Offices had their own definitions Product sold through direct sales force 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

7. Slide 7 UK: The early years In 1990’s, IFA share of market started growing List of diseases started to grow Most products covered more than 30; many not meeting needs or added little or no benefit Bancassurer entered market; CI included in mortgage benefit package First standard definitions issued in April 1999 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

8. Slide 8 UK: The early years In 1990’s, IFA share of market started growing List of diseases started to grow Most products covered more than 30; many not meeting needs or added little or no benefit First standard definitions issued in April 1999 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

9. Slide 9 UK: History in Numbers Protection Premium Trends 60 70 80 90 100 110 120 Q1 1999Q3 1999 Q1 2000 Q3 2000Q1 2001 Q3 2001 Q1 2002Q3 2002Q1 2003 Q3 2003 Q1 2004 Q3 2004 Q1 2005Q3 2005 Q1 2006 Life Premium Gtd CI Premium R CI Premium Sale Volume Trends

10. Slide 10 UK: Concerns by 2002 Poor depth of underwriting – Short application forms not capturing all risk factors – Low levels of retention = low investment by companies in underwriting staff and processes – High proportion of applications accepted on standard terms Concerns over medical advances – e.g. PSA testing detecting prostate cancer – large number of diseases increases uncertainty in projecting costs 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

11. Slide 11 UK: Concerns by 2002 General trend of under pricing – longer than anticipated delays = inadequate IBNR adjustments – poor data quality – volatile claims experience = uncertainty regarding cost Other concerns – Evidence of anti-selection – TPD claims management concerns – Definition drift, i.e. paying unintended claims 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

12. Slide 12 UK: Resulting actions Given the concerns, a number of reinsurers withdrew from the guaranteed CI market This resulted in: – a reduction in capacity/increase in prices – an opportunity to improve the risk controls ABI definitions – Worries about PSA testing led to stage 1 prostate cancers being excluded 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

13. Slide 13 UK: Resulting actions Product changes – Number of diseases reduced to +/- 25 – In particular, angioplasty was removed; number of operations was increasing by 10% p.a. – Cover ceased at age 65 – Some options were removed Partnerships between reinsurers and clients – More detailed application forms + clearer questions – Strengthen underwriting and claims procedures 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

14. Slide 14 UK: Resulting actions Pricing – Following changes, claims experience more stable – Swiss Re helped clients to analyse their experience – In-depth analysis of historical trends – Long settlement delays  adequate IBNR adjustments Anti-selection – Higher proportion of substandard lives rated/declined – Also dealt with through non-disclosure – Application form asks for other policies to be disclosed 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

15. Slide 15 Declined claims: a multi-layered issue Declined for not meeting definition = 11% Declined for non-disclosure = 12% Non-linked non-disclosure = 6% (Est) What can we do to reduce non-disclosure? Improve proposal forms Distribution monitoring Simplified / tele underwriting Retrospective medical evidence on all lives Amend definition of non-disclosure Can we change how we deal with non-disclosure? Change philosophy to pay non-linked claims Non-contestability clause Total claims declined = 23% Typical office writing new business What can we do to reduce declined claims? Increased education Screen and assess claim enquiries Consider scope of coverage Tiered benefits

16. Slide 16 Non-disclosure in the UK Anti-selection is largely dealt with by obtaining GP report at claims stage Non-disclosure could void the claim. ABI splits non-disclosure into: – Fraudulent VOID – Clearly Reckless VOID – Inadvertent & Linked DEPENDS – Inadvertent & Non-linked DEPENDS – Innocent PAY Some companies have started to publish their declinature rates = +/- 20%, 50% of these due to non-disclosure This has damaged people’s trust in CI Law Commission looking into non-disclosure; considering introducing non-contestability after 3 years for anything not fraudulent 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

17. What next? 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

18. Slide 18 Where to go next? Since 1986 Industry has just tweaked product – add definitions / broaden definitions – play the “Aequos game” – service / underwriting Market has reached a point where – run out of easy value-add illnesses – affordability stretched – product being sold where not intended – some negative press… - declinature rates, non-disclosure, complexity.. 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

19. Slide 19 How to solve the CI problem? Current issues: Affordability Adverse publicity arising from declined claims Lack of consumer confidence Elements of IP may be a better fit Complying with TCF guidelines Differing views on the future between advisers and providers (and amongst providers!) Stagnating sales volumes 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

20. Slide 20 Swiss Re research Quantitative All significant UK product providers Over 100 RIs from distributor firms Qualitative IFA focus group 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

21. Slide 21 Challenges from the research Whilst price is important – distributors have little appetite to see impairments reduced Many conflicting messages – how should market proceed? Will product ‘tweaks’, e.g. adding conditions, introducing instalment payments or tiered benefits, actually grow the market? 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

22. Slide 22 Swiss Re CI survey: is it any wonder we struggle to innovate? “Broaden cover” “Decline fewer claims!” “Make more affordable” “Reduce complexity” “Bring in more illnesses and layers of cover” “Reduce cost” “Companies should be more innovative” “Standardisation is really important” “Add illnesses that add value…” “….but that will not increase the cost of the product” 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

23. Slide 23 Innovation: Tele-underwriting in the UK A number of companies are starting to use tele- underwriting Medical professional, e.g. nurse, phone applicant on receiving application form Aim is to extract better/more information through open and repeated questions Applicant more likely to disclose relevant information to medical person during an informal chat Stops salesmen interpreting questions Should reduce the number non-disclosures, but probably won’t stop fraud 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

24. Slide 24 Summary Product was very successful in the UK… But intense competition created some cracks Tight risk management controls and new ABI definitions were implemented Value of many elements of the cover can be questioned Definitions never perfect – and need to be regularly examined and updated Consumer understanding an issue 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

25. Slide 25 Critical Illness – some lessons to learn from UK Beware of definition drift Don’t play the “Aequos game” Good application form design coupled with sales training for agents can improve : – non-disclosure – underwriting and – experience Clarity for consumers can improve claims processes Definitions based on detection of disease can be a major concern 10 th Global Conference of Actuaries 7-8 th February 2008 Mumbai, India

26. Critical Illness – Lessons to Learn from UK Market Discussion SUNIL SHARMA, MSc, FIA, FASI Swiss Re Europe SA, UK Branch