Critical Illness Morbidity Review and New-Business Repricing
An insurer's critical illness (CI) product has been in force for six years. At pricing, the assumed incidence rate for a 45-year-old male non-smoker for the first cancer diagnosis was 2.8 per 1,000. The latest three-year experience study shows 3.3 per 1,000, about 18% above pricing. The product has a level premium guaranteed for 10 years and a 30-day survival period. Sales have grown 25% year on year, and the distribution channel is resisting any premium increase. The reinsurer has offered to keep the existing reinsurance terms only if the insurer increases retention by 40% or accepts a 12% rate increase on new business. The regulator requires that any re-rating apply only to new business unless contract terms permit otherwise. The actuarial team must decide whether to re-price new business, change the product design, or use reinsurance differently, and how to communicate to management.
1. Assess the credibility of the 18% morbidity excess and identify explanations other than pure deterioration.
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An 18% excess is material but not automatically credible. Over three years, if expected claims were 28 and observed 33, the Poisson standard deviation is about 5.7, so the excess is roughly one standard deviation and could be random. I would need exposure by age, sex, smoking status, distribution channel and policy duration. Possible explanations include a mix shift to older or substandard lives, looser underwriting, increased cancer diagnosis due to screening, a change in claim definition or survival-period administration, antiselection through a broker channel, or data quality issues.
I would calculate confidence intervals, run a duration and cohort trend analysis, and use credibility weighting. If company data are limited, blend with reinsurer experience. Only after separating mix and definition effects would I treat the 18% as a permanent deterioration requiring repricing.
2. Evaluate the options to restore profitability, distinguishing existing and new business.
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Existing business has a 10-year premium guarantee, so re-rating is generally not permitted; the insurer must absorb the excess or use expense reduction, claims management and reinsurance. For new business: (a) increase rates; the 12% reinsurance increase is a market signal, but the insurer may need 15–20% to restore margin after expenses; (b) redesign by reducing early-stage cancer cover, extending the survival period, adding exclusions, or introducing wellness incentives; (c) change distribution mix and underwriting; (d) increase retention only if the insurer has capital and expertise, or accept the reinsurance increase as the cost of certainty.
Each option affects sales and competitiveness. A combination is likely best: file a new-business rate increase, tighten definitions, and renegotiate reinsurance. The key is not to overreact to one noisy study, but to build a margin for adverse deviation.
3. Recommend a course of action and a communication plan.
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Recommendation: file a new-business premium increase of at least 15% after regulatory approval, and simultaneously redesign the product to reduce antiselection. Do not attempt to re-rate in-force business. Increase retention only if the insurer has capital and expertise; otherwise accept a reinsurance rate increase as the cost of certainty. Quantify the profit impact for management: existing block margin compression, new-business break-even period, and capital strain.
Communicate to distributors with a value story, not just price. Set a 12-month monitoring plan with quarterly experience review and a trigger to withdraw the product if sales collapse or claims worsen. Document the credibility analysis and rationale for the regulator.