Critical Illness Insurances: Challenges and Opportunities for Insurers

• Author: Nadine Gatzert,Alexander Maegebier
• DOI: http://doi.org/10.1111/rmir.12033
• Date: 01 September 2015
• Published date: 01 September 2015

Risk Management and Insurance Review

C

Risk Management and Insurance Review, 2015, Vol.18, No. 2, 255-272

DOI: 10.1111/rmir.12033

CRITICAL ILLNESS INSURANCES:CHALLENGES

AND OPPORTUNITIES FOR INSURERS

Nadine Gatzert

Alexander Maegebier

ABSTRACT

Since the first introduction of critical illness insurance in 1983 in South Africa,

the product has successfully spread to some insurance markets, especially in

Asian and Anglophone countries, but market penetration remains low in other

countries. For this reason and because of the increasing relevance of dread

diseases, the aim of this article is to provide a first comprehensive overview

of challenges and opportunities associated with critical illness products for

insurers.Toward this end, we first present the various product designs, as well as

the developments that have taken place within the market before comparing this

form of coverage to alternative insurance products in order to better assess the

market potential. Based on these assessments, we thoroughly discuss the major

challenges and opportunities within the market from the insurer’s perspective.

INTRODUCTION

Critical illness insurances (CII, also referred to as “dread disease” or “trauma [recovery]”

insurance) pay a lump-sum upon diagnosis of a severe and/or critical condition that

may not necessarily be life threatening. This type of insurance was first introduced in

1983 in South Africa. Along with the pioneering cancer policies of the United States,

Israel, and Japan (see Dash and Grimshaw, 1993), this product aimed to fill a gap in the

coverage of health and disability insurance policies (see Munich Re, 2001). In addition,

even though savings products in the life and pension context remain highly relevant,

insurers are simultaneously and increasingly concentrating on productinnovations with

a focus on biometric risk as part of their core business, for example, CII. While these

products exhibit a considerable market share in Asian insurance markets and are also

offered in various other markets, especially in the United Kingdom and Japan (mostly

cancer insurance; see General Re, 2007; PartnerRe, 2009), several developments and

issues, for example, the progress in medical science, combinations of policies into one

The authors are at the Friedrich-Alexander University Erlangen-N¨

urnberg (FAU), Depart-

ment of Insurance Economics and Risk Management; phone: +49 (911) 5302-884; e-mail:

nadine.gatzert@fau.de and alexander.maegebier@fau.de. The authors would like to thank two

anonymous referees for valuable comments and suggestions on an earlier version of the article.

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product, and the definition of critical conditions, provide major challenges and chances

for insurers.

In the literature, most information about the products and the markets are spread

over several industry reports (see, e.g., Munich Re, 2001; General Re, 2007; PartnerRe,

2009), while the academic literature has to date mainly focused on actuarial models

(see, e.g., L¨

orper et al., 1991; Allerdissen et al., 1993; Haberman and Pitacco, 1999) and

underwriting (see, e.g., MacDonald et al., 2005a, 2005b), or on the more general area of

health insurance, thereby also addressing critical illnesses (see, e.g., Christiansen, 2012).

In this article, we study the critical challenges and opportunities for insurers, as well as

the different designs of CII in detail and from practical and theoretical points of view

compared to other insurance policies. Toward this end, we first present the various

product designs in a compact manner, along with a brief overview of the product’s

global market development. Following on, we conduct a comparative assessment of CII

compared to other existing policies in order to identify the role of CII as an extension

or substitute and to highlight the product’s advantages and disadvantages. Finally, we

provide a thorough discussion concerning the major challenges and opportunities for

insurers when offering these products, including demand factors and marketing issues.

Finally, we provide a summary of the research results.

CII: CONTRACT DESIGN AND MARKET DEVELOPMENT

Coverage

The first CII, also referred to as “dread disease”1insurance, was introduced in South

Africa in 1983 by Crusader Life (see, e.g., General Re, 2007) and covered the four most

common critical illnesses: cancer,heart attack, stroke, and coronary artery bypass surgery

(see, e.g., Dash and Grimshaw, 1993). Although surgical procedures do not technically

represent a disease, these four cases have been classified as the “basic four” dread

diseases (see Baars and Bland, 1993).

In the event of a severe and typically life-threatening disease such as those consisting of

the basic four, (traditional) CII provides a single lump-sum payment to the insured(see,

e.g., Munich Re, 2001).2This lump sum is classified as a “living benefit,” as it is paid out

after diagnosis and upon the patient surviving a specified serious disease; therefore, CII

is not designed to compensate for specific expenses or for the loss of earnings (see, e.g.,

Dash and Grimshaw,1993; Munich Re, 2000). Instead, the benefit is meant to support the

policyholder in times of financial distress and the use of the benefit is entirely flexible.

For instance, the payment allows for the compensation of expenses that are related to the

disease, such as medical costs (see, e.g., Allerdissen et al., 1993). This is relevant because

the use of the latest medical technology is rarely covered by health insurance (see Longo

and Grignon, 2009). As spending of the lump sum is entirely up to the insured, the

1The first product name, “dread disease,” was changed to “critical illness” for marketing reasons;

in Australia, the more common term was “trauma (recovery) insurance” (see Krause, 1998a;

Munich Re, 2001).

2In this article, the covered conditions may be described as “disease” or “illness,” despite the

fact that some are not actually illnesses. Moreover, innovations have resulted in products with

multiple lump sum payments, which are discussed in more detail in the fourth section.