Health and care insurance and investments
Domain 8 covers health and care insurance: morbidity risk, product design, pricing and the interaction with state provision.
Core ideas
- Products: private medical insurance, income protection, critical illness, long-term care, dental and cash plans, group risk.
- Pricing needs incidence, claim duration, recovery and termination rates, medical inflation (often above CPI), expenses and the underwriting basis.
- Underwriting: medical history, exclusions, loadings, waiting periods; guaranteed renewability creates adverse-selection risk. Community rating pools risk; experience rating does not.
- Long-term care depends on activities of daily living, means-tested state support and the cost of care.
Worked example
An income protection policy has annual incidence 0.4%, pays £25,000 a year in advance, and average claim duration is two years. At a 4% discount rate the annuity-due factor is 1 + 1/1.04 = 1.9615, so expected claim cost per policy is 0.004 × 25,000 × 1.9615 = £196.15. Adding £30 of expenses gives £226 before margins. Reasoning: a longer claim duration or higher medical inflation raises the cost sharply, and the insurer must also hold capital and a profit margin.
Traps
Confusing morbidity with mortality; ignoring medical inflation; assuming critical illness definitions are standard; forgetting state provision crowds out demand; ignoring adverse selection in guaranteed-renewable business.