Health and Care
Health and Care tests whether you can turn morbidity risk - the chance of falling ill, staying ill and recovering - into priced products, reserves and capital. The domain spans private medical insurance (PMI), income protection (IP), critical illness (CI), long-term care, and the state/NHS financing backdrop. Marks are earned for health-specific data and UK institutional detail, not generic life-insurance logic.
Core concepts
- Morbidity drivers: incidence, claim duration, recovery and relapse rates, and the definition of incapacity. IP usually uses "own occupation" in the early years and moves to "any occupation" later; the deferred (waiting) period is the biggest single lever on claim cost.
- Product mechanics: IP replaces a proportion of earnings and offsets some State benefits; CI pays a lump sum on survival of a defined period after a severity-based event; PMI pays treatment costs and faces medical inflation above CPI.
- State context: the NHS is tax-funded and free at the point of use; adult social care in England is means-tested under the Care Act 2014, with capital limits and a lifetime cost cap that has been repeatedly deferred.
- Techniques: multistate models for IP, CMI morbidity/mortality experience, morbidity-adjusted premiums, IBNR and claim reserves, Solvency UK technical provisions and morbidity stresses, Consumer Duty fair-value assessment.
Worked example
Price a guaranteed-renewable 12-month IP contract. Annual incidence is 4 per 1,000, average claim duration 18 months, benefit GBP 2,000 a month. Expected claim cost per policy = 0.004 x 1.5 x GBP 24,000 = GBP 144. Load expenses at 20% of premium and profit at 5%: premium = 144 / (1 - 0.20 - 0.05) = GBP 192. The policy is annual but claims run past the year end, so a claim reserve is needed for lives in payment - the pricing margin is not the reserve.
Traps
- Using population incidence for insured lives: selection lowers incidence but often lengthens duration.
- Shortening the deferred period without repricing - both short claims and anti-selection rise.
- Ignoring the State benefit offset in IP, or the survival period in CI.
- Forgetting medical inflation when projecting PMI claims.