Enhancing the Value of Critical Illness Insurance
By Ashlee Borcan and Jimmy Weck
Product Matters!, February 2022
Critical illness insurance is a popular supplemental health insurance product in the U.S. market. According to Milliman’s 2021 Critical Illness Product Survey, the U.S. critical illness insurance market has over $2.2 billion of in-force premium. Critical illness insurance typically pays a fixed, lump sum benefit for covered conditions such as cancer, heart attack and stroke.
One challenge for carriers when developing and selling a critical illness product is that the term “critical illness” is not commonly used outside the supplemental benefits insurance industry. Would you consider COVID-19 requiring hospitalization, or severe depression, to be examples of a “critical illness”? Most of us would answer yes, but these conditions have not traditionally been covered by critical illness insurance. This lack of clarity and use of industry jargon can cause confusion and dissatisfaction for insureds who make claims for life-altering events they view as critical illnesses only to discover that the conditions are not covered by their critical illness policies.
In order to combat dissatisfaction, many carriers are adding new covered conditions to their critical illness insurance products. These innovations are often done, in part, due to carriers wishing to distinguish themselves and gain market share. Additionally, many consumers and product stakeholders view these innovations as creating more well-rounded insurance products. This article will discuss some of the new covered conditions that carriers are adding to their critical illness products. These conditions are relatively new to the supplemental benefits industry and pair nicely as an enhancement to traditional covered conditions. The conditions discussed below fit the overarching goal of many critical illness products, which is to provide an insured a payment in cases when a diagnosis is likely to involve costly treatment, recovery, and other services such as compensation for lost wages.
Below we list a selection of recent benefit innovations with a focus on the identified consumer need, as well as development considerations that need to be taken into account when adding each benefit to a critical illness insurance contract.
Autism Spectrum Disorder (ASD)
Consumer Need
In 2021, the Centers for Disease Control and Prevention (CDC) reported that approximately one in 44 children in the United States is diagnosed with an ASD (or autism). Additionally, on average, autism costs an estimated $60,000 a year through childhood, with the bulk of the costs in special services and lost wages related to increased demands on one or both parents.[1]
Development Considerations
The childhood incidence rates for conditions covered by traditional critical illness insurance are a small fraction of the incidence rates for adults, leading carriers to consider the inclusion of child-specific conditions in order to appeal to parents purchasing coverage and to add value for children covered by the policy. Some carriers commonly charge no additional premium for adding coverage for a dependent child; carriers taking this approach embed the cost for children within the rates for the adults. Inclusion of a condition like autism could increase premium sufficiently for children such that a carrier will need to determine whether this approach remains suitable.
Additionally, when evaluating the design of an autism benefit, it is important to understand that different levels of autism can be diagnosed, and each level would require different levels of support for the diagnosed child. It will be necessary to establish diagnostic criteria and place appropriate risk controls around individuals who may have autism prior to purchase of the policy.
Mental Health Disorders
Consumer Need
An estimated 26 percent of Americans ages 18 and older—about one in four adults—suffer from a diagnosed mental disorder in a given year.[2] Across the U.S. economy, serious mental illness causes $193.2 billion in lost earnings each year.[3] In 2018, after excluding hospitalization related to maternal and neonatal stays, mental health conditions represented three of the top five principal diagnoses for inpatient stays among adults aged 18 to 44.[4]
Development Considerations
In recent years, both employers and employees have become much more aware of the prevalence and impact of mental health conditions with a greater societal push for recognition and acceptance. There are several mental health disorders that carriers could choose to consider covering in their critical illness insurance product, including severe depression, bipolar disorder, schizophrenia, and post-traumatic stress disorder (PTSD). Would a carrier want to add these conditions, and potentially many more, to its critical illness product, or would it rather create a “catch-all” mental health disorder benefit? In the event of a “catch-all” benefit, a carrier would have to carefully consider the severity threshold established in order to ensure that it is appropriate across a wide variety of mental health conditions. The percentage of adults experiencing symptoms of an anxiety or a depressive disorder has increased recently[5] and this trend needs to be considered in rating by pricing actuaries.
An additional complication with respect to offering mental health coverage on a critical illness product is that there is a huge push in the market for providing coverage for the reappearance of a previously diagnosed condition. Within the industry, this is commonly referred to as a recurrence benefit. Recurrence rates among many mental health disorders are known to be very high.[6],[7] When offering mental health coverage on a critical illness insurance product, carriers will need to consider if they can offer recurrence coverage at an affordable premium rate.
Specified Disease Coverage
Consumer Need
Traditional critical illness insurance may include coverage for a list of specified diseases such as encephalitis, malaria, rabies, tetanus, and tuberculosis. This coverage has typically been included in critical illness policies in the past to compete with a similar type of rider traditionally offered on standalone scheduled cancer policies. This benefit was usually very inexpensive because the covered diseases included, while numerous, were typically very rare. In fact, some carriers today are still covering smallpox, which has been listed as eradicated by the World Health Organization since 1980! While this historical approach often does not provide much value to current insureds, recently carriers have been looking to modernize this benefit to provide coverage for insureds facing a COVID-19 diagnosis with severe symptoms. Many carriers have expanded their specified disease coverage to include benefits for COVID-19 and other infectious diseases that result in a hospitalization, such as influenza and pneumonia.
Development Considerations
Carriers looking to expand their specified disease coverage will need to determine whether they want to explicitly list the diseases they would like to cover, or instead include open-ended wording for a broad array of infectious diseases. While the latter option will be more appealing to consumers, it creates more expensive pricing and additional risk considerations for carriers that elect the configuration. Broad coverage carries the risk of needing to pay benefits for an unknown future disease or an outbreak of a current infectious disease. Also, careful discussion should be had regarding exactly what is considered an infectious disease. While many carriers would clearly include COVID-19 and influenza, depending on the exact wording of the benefit definition, post-surgical infections (as an example) may also be payable, which may not be the carrier’s intent.
Additionally, carriers will need to decide what severity threshold is required for a payment to be made and how to measure severity. Often a carrier will require hospitalization due to a covered specified disease for a certain number of days before an insured is eligible to receive a benefit.
Enhanced Cancer Coverage
Consumer Need
Traditional critical illness insurance coverage pays a lump sum benefit amount upon the diagnosis of cancer. Potentially, another benefit can be paid if an insured has a recurrence of cancer after a treatment-free period (i.e., the cancer returns after a period of remission where no treatment is received). However, the goal of some current cancer treatments is not curative and patients may undergo treatment for the remainder of their lives.[8] In this situation, insureds may never be eligible for a recurrence benefit for their invasive cancer because they are unable to go the required time period without treatment for their cancer.
Development Considerations
There are many ways to design cancer benefits for insureds diagnosed with a cancer in which the goal of treatment is not curative. Examples include treatment-based benefits, such as those found in a standalone cancer product, or an additional lump sum benefit that pays when cancer metastasizes to other parts of the body from the original site of diagnosis. Treatment-based cancer coverage has been offered in the past as a standalone product by carriers and has been challenging for some carriers as a result of adverse claims trends due to advances and changes in cancer treatment not considered at the time of product development. Insureds facing lengthy treatment timelines will appreciate an additional benefit payment beyond the initial lump sum benefit offered by traditional critical illness insurance.
Conclusion
Many critical illness insurance carriers are rethinking their products and looking for ways to expand coverage and provide more value to their customers. By adding benefits such as those mentioned above and opening their minds to new ones, carriers can design a product that appeals to a broad customer base. Product innovations can drive critical illness insurance to cover more “critical illnesses” than ever before.
Statements of fact and opinions expressed herein are those of the individual authors and are not necessarily those of the Society of Actuaries, the editors, or the respective authors’ employers.
Ashlee Borcan, FSA, MAAA, is a principal and Consulting Actuary at Milliman. She can be reached at ashlee.borcan@milliman.com.
Jimmy Weck, FSA, MAAA, is an actuary at Milliman. He can be reached at jimmy.weck@milliman.com.