The challenges of partial payouts in critical illness insurance

_{November 2024}

Critical Illness (CI) insurance in Canada is at a crossroads. Reacting to consumer sentiment and regulatory scrutiny, carriers are weighing the pros and cons of product modification, including whether to broaden coverage to include less severe conditions. This article considers the implications of expanding CI insurance coverage in this way and what that might mean for the product’s intended purpose. 

What does reduced payment CI insurance look like in Canada? At present, the definition for each covered condition that is eligible for full payout is carefully described. For a small number of conditions, the policy also describes less severe variants that may be eligible for a reduced or partial benefit. Examples of these are non-invasive (in-situ) breast cancer or very early-stage prostate cancer.

Other countries use different approaches and terminology in their CI product offerings:

• In South Africa, ‘severity-based’ definitions have been developed, creating multiple severity tiers for covered conditions, each tier with a different definition and a different payment level.
• In Singapore, ‘outcome-based’ products provide payments based on the severity of a disease outcome or treatment rather than on its diagnosis.
• In China and Singapore, in addition to full payout for severe conditions, small payments for ‘minor’ or chronic conditions such as osteoporosis and dyslexia have been added.

Regardless of the approach, consumers in other markets worldwide have greater access to both full and reduced benefits by virtue of the number of covered conditions and the multi-stages available under those conditions.

But how successful are these reduced-payment CI insurance policies? The lack of reliable data and the variations in product offerings make this question difficult to answer. In Asia, CI insurance sales have fluctuated over time and the advent of reduced payments has not reliably correlated with increased sales. Nor is it clear that customer satisfaction has improved with the offering of reduced payments. This is a metric that is not easily measured. 

Companies considering reduced payment CI insurance will need to consider all angles, including the following challenges.

More to understand
With their combination of medical and insurance terminology, CI insurance products are complex and challenging to understand. Medical definitions have become lengthier over time. For example, the Canadian benchmark definition of cancer expanded from 100 words in 2008 to 504 by 2018.⁴ Adding non-severe variants of a condition(s) would require a definition for each variant, which would add further length. Further, these new definitions would need to be sufficiently clear to facilitate consumer understanding while accurately reflecting medical, underwriting, claims, and legal perspectives.

More to explain
Insurers and reinsurers will likely define and adjudicate differently for the same condition. Insurer A may pay out, say, 25% of the sum assured because a certain level of severity under a covered condition has been met, while insurer B may pay out a different benefit amount according to its own insurance definition. Understanding the ins and outs of any one product, much less understanding the variations across insurers makes CI insurance products difficult for an advisor to comprehend, explain, and sell.

Complicated claims adjudication
While claim denial rates could drop with partial benefit policies, claims adjudication could become more involved. In companies without a full-time medical officer, claims teams may have difficulty distinguishing levels of severity, potentially leading to more disputes and litigation for insurers. Complications could occur if a policyholder’s condition worsens following claims submission. Adding severity levels could also create dissatisfaction with policyholders who may consider themselves eligible for a higher severity category and, thus, a larger benefit. 

Process upheaval
Internal processes would also need to evolve. Companies and reinsurers will need to implement administration and claims systems to track retention, determine partial benefits based on the current sum insured, and monitor experience.

Overdiagnosis risk  
New diagnostic technologies are expected to have a major impact on CI insurance. For example, novel blood tests such as ‘liquid biopsies’ permit earlier cancer detection than is presently available. Similarly, artificial intelligence (AI)-assisted analysis of vast quantities of data holds the potential for earlier diagnoses. These medical advancements could allow treatments to begin earlier and result in a positive impact on mortality – a good outcome overall. There is, however, the possibility of diagnosing very mild disease variants that are unlikely to impact mortality or morbidity. This situation, called ‘overdiagnosis’, is a recognized drawback of AI-assisted diagnosis. Companies implementing reduced payouts should be prepared for an increase in the number of CI insurance claims as a result of early diagnosis. They should also recognize the importance of continually monitoring the development of new diagnostics.

Information asymmetry risk
With earlier diagnoses and the discovery of more minor disease variants, the possibility of information asymmetry becomes a concern for CI insurance practitioners. That is, individuals are likely to possess large quantities of personal data acquired via wellness or commercial diagnostic products. In an AI-dominated future, the quantity and reliability of genetic information are expected to explode, and that information cannot be provided to insurers.

Pricing and cost considerations
A common sentiment among advisors is that CI insurance products are expensive and difficult to sell. According to Munich Re’s 2024 Individual Insurance survey, the average premium of an individual CI insurance product was $12.50 per year per $1,000 of face amount in 2023, compared to $7.40 for an individual life insurance product.² Supplemental CI insurance coverage (partial payouts in addition to full benefit payout) is common in Canada and expanding partial payout coverage would likely increase the cost of CI insurance.

With limited claims experience to draw on, insurers may lack the data to adequately determine the incidence rates for the different severity stages. CI insurance products in Canada are predominantly offered with guaranteed premiums for the life of the product. The lack of data for partial payout conditions may require additional margin to support the premium guarantee.

One alternative to guaranteed premiums is adjustable premiums. In other countries offering severity-based CI insurance, adjustable premiums are more common and can result in lower premiums since there may be a limited or no guarantee period. Adjustable premiums also provide the leeway for insurers to adjust pricing for some of the unknowns mentioned above – rapid changes in medical knowledge and disease definitions, the likelihood of earlier disease diagnoses, and changing trends in disease incidence. However, there seems to be a very limited appetite in Canada for adjustable premiums.

Insurers strive to do the best for policyholders, and looking for more ways to satisfy customer needs is always welcome. But what should the future hold for CI insurance?

Already, Canadian insurers can choose to provide a reduced payout for less severe variants of a covered condition, such as early-stage prostate cancer or minor surgical treatment. So, at first blush, the argument in favour of continuing on this path of reduced payouts appears compelling: expanding covered conditions should ultimately reduce claim denial rates, which could lead to improved customer satisfaction and perhaps increased sales.

However, this might be a simplistic conclusion. With reduced payouts comes additional product complexity and potentially more confusion. Advisors must explain the tiered benefit structure, claims adjudicators must deal with iterations of medical documentation when a condition evolves, and finally, the insurer must communicate that the claimant is only eligible for a reduced payout. This environment is not necessarily conducive to customer satisfaction.

Perhaps more importantly, the conversation about reduced payments for minor variants of a condition misses a more fundamental discussion about the role of CI insurance in Canada. Critical illness insurance, as its name implies, was designed to provide financial assistance to individuals facing a “catastrophic” or “critical”, life-changing medical event that has a meaningful impact on the policyholder’s finances and lifestyle. Reduced payments for minor conditions represent a major departure from this original intent. One could reasonably ask why a payment for a minor illness is necessary. What objective is being fulfilled? Should we rebrand the product as “Not-So-Critical Illness” insurance? Canadian insurers must move forward thoughtfully to avoid diluting the product’s primary purpose.

Broadening the CI product to include non-critical conditions introduces complexity that is unlikely to solve the current criticisms of CI insurance: consumer confusion and claim denials. Education for advisors and consumers remains the most important factor in improving awareness and understanding of CI insurance in Canada. In the end, consumers look to advisors and insurers to explain the need for CI insurance, how the product works, and the path from diagnosis to claims payment. As an industry, it is our responsibility to ensure we are selling the right product for the right need.