EUROPEAN PAPERS ON THE NEW WELFARE

Abstract

This paper discusses the insurance market for products for ‘seniors’ in Europe, i.e. those aged over 65, with particular reference to those suffering chronic illnesses. It also provides brief information about four products which, if developed further, may assist in meeting the needs of seniors in Europe — especially those who are chronically ill. It also discusses how these products can be more quickly underwritten by insurers.
The paper examines the need for trust between seniors and their Financial Planning advisors. It emphasises the importance of planning for retirement whilst one is younger and in good health and in doing so, to build a relationship with a trusted advisor as early as possible.

1. Background

In Switzerland it has been estimated that the percentage of the population aged over 65 will increase from 25% in 2000, to 60% in the year 20602. Similar large estimates of demographic ageing have been made for other countries in Europe³. The costs associated with demographic ageing, e.g. funding future healthcare and reasonable living standards for seniors through social security benefits, are worrying treasury officials of many governments. In considering the problem, governments also have to consider that the tax burden does not become too onerous on future generations, and on companies who provide and fund many social benefits for their employees.
It is a difficult and well-known problem especially in Europe where the 3-pillar system has built an expectation that in their older years, seniors will be ‘looked after’ by their governments and their pensions will be sufficient to maintain a reasonable living standard and healthcare.
The Geneva Association has addressed this and has already proposed a fourth pillar which looks to flexibly extend the working life of seniors past normal retirement⁴. Such an approach recognizes the under-used economic resource of seniors and their experience and ‘know-how’ in the workplace. From the insurance perspective however, providing insurance benefits for those seniors who work past normal retirement will provide challenges, especially for disability insurance – such products are yet to be fully developed.

2. The Health of Seniors

“Growing old is not for sissies”, Bette Davis
At age 65 whilst many will be in fine health, others are already suffering the effects of disease or accidents. A recent study in the USA⁵ indicated that in the age group 65-74, 25% of the population was already subject to a an illness or medical condition that restricted them in some way.
Most seniors will develop a health condition as they age. Some will suffer chronic conditions which will cause pain and debility or cognitive deficit, and may eventually result in the need for both short-term and long-term care. The question arises as to whether insurers can develop sustainable products for those in good health until very old age (i.e. to insure longevity) and to assist those whose health is failing or who already suffer chronic conditions (which nevertheless may continue for several years)? I wish to look at this by discussing four products that may be of increasing importance in Europe in future years.
Before doing so, one must discuss how insurers should best collect evidence on the states of health of seniors if they propose insurance contracts. One factor which may assist insurers is that seniors often have a very sound knowledge of the medical conditions from which they suffer, their treatment and the associated medical tests they have undergone-and their results. Traditionally, insurers have requested applicants to complete an insurance application that contains a long set of health questions (known as a ‘personal statement’). This will often be supplemented by a medical examination or blood tests or, more often, a report from an applicant’s doctor (known as an ‘Attending Physician’s Report’ or ‘APS’). Obtaining such information may take a long time especially when APS is required. Delays in issuing policies that are integral to a senior’s needs for the future will often result.
Some alternatives to streamline the collection of health data have been developed, i.e. ‘tele-underwriting’ and data collection through ‘Point of Sale’ computer systems. Both of these could benefit from seniors’ knowledge of their own health status.
Tele-underwriting⁶ is a process whereby, after the completion of the insurance application, a trained person, most likely a nurse, will ring the applicant, and ask the questions on the Personal Statement. If a ‘yes’ answer is given to a particular question, the interviewer asks further questions (drill-down questions) to elicit more information about the disclosure. For example if a ‘yes’ answer is given to a question on Chest Pain, the applicant will be asked for the dates of incidents of chest pain, the symptoms suffered, the diagnosis, treatment and period of treatment, the results of ECGs or other investigations (if known), and the name and address of the attending physician or hospital. Often, the ‘tele-interview’ is underpinned by an expert system that provides the necessary drill-down questions and processes the outcome, enabling an automated acceptance in a proportion of cases.
Also, Point of Sale systems collect the answers in Personal Statements on a laptop or computer held by the insurance agent or broker. They usually are able to provide the same sort of drill-down questions that are employed in a tele-interview. With both methods, questions on the chronic illnesses and the level of debility suffered can be asked. Extensive answers are often given by the claimant, such that the application can be assessed without further medical reports or tests. Additionally the information from tele-underwritten or point of sales applications can be used in conjunction with other tools to derive reasonable estimates of future life expectancy. This is important if the senior is, say, seeking an impaired life annuity (cf. below). Both methods are increasingly used around the World to collect personal statements — across all age groups — and their use will minimize the need for an APS and the delays associated with obtaining this. Faster completion of applications submitted by seniors should then follow.

3. Products

3.1 Long Term Care

This is a product that was initially designed for seniors in the USA where it is available from many insurers. It is also available in France, Germany and the UK (although only a few insurers there now write it) but it is not commonly available in other parts of Europe — possibly because of the extensive cover provided by health insurance products. However, as the cost of health care rises in future, social security benefits and health insurance covers may correspondingly reduce. If so, long term care insurance may fill the void.
It is ideally suited to providing benefits to those suffering from chronic illnesses. Long term care (LTC) policies typically provide daily, weekly or monthly benefits if the life insured needs ‘at-home’ care or care within a qualifying institution. Normally the policy includes a requirement for payment when the life insured cannot do two or more of the activities of daily living or suffers severe cognitive impairment. LTC policies may be standalone policies or ‘rider’ benefits attached to traditional life insurance policies. Benefits are paid up to pre-defined monetary limits or for maximum benefit periods (though some may also provide lifetime benefits). Other benefits such as Cost of Living adjustments, waiver of premium, respite care, bed reservation benefits and certain provider benefits may also be included. Policies cannot usually be cancelled if there is a poor claims experience and premiums mostly are not guaranteed. An applicant for Long Term Care must disclose their full health history — there is a long Personal Statement — and will be carefully underwritten by the insurer. Exclusion clauses may for example be proposed on some existing medical conditions suffered by the applicant.
For LTC in the USA, Friedrich7 has noted that the experience has not always been favourable. Some insurers have withdrawn this product. Friedrich has identified insurers’ concerns regarding longevity of those with chronic conditions, combined with concerns over capital requirements, regulatory demands and consumerism demands as reasons for withdrawal from the market. Additionally, he states some companies were hurt by a lack of underwriting expertise. (To some extent this could be overcome through automated underwriting associated with tele-underwriting and point of sale data collection.)
Nonetheless with competent pricing — especially for the longevity risk even when chronic illnesses exist — sound underwriting, and competent disclosure of past health by applicants, a LTC product could well be sustainable in various European countries and provide a market niche which will help meet the needs of seniors.

3.2 Impaired Life Annuities

These are annuities designed for those who at the time of retirement are already suffering a chronic illness. Unlike traditional annuities, these are fully underwritten with full details of the applicant’s state of health being obtained. After receiving full health data, the insurer makes an estimate of the remaining life expectancy of the applicant. Then considering the lump sum that the life insured is prepared to ‘invest’, an enhanced annuity is offered, noting the shortened life expectancy of the insured⁸.
This contract is popular in the UK — possibly due to legislation there. An illustration shown on the informative UK website, sharingPensions⁹, may assist in explaining this concept. There for a male aged 65 suffering advanced lung cancer with no spread who contributes a payment of £100,000, an annuity of £15,050 may be granted, compared to a standard annuity of £7,390.
For insurers, obtaining sufficient medical evidence to underwrite the annuity is not easy. Tele-underwriting and point of sales systems can assist greatly in this regard although in some cases, an APS will still be needed. Noting in Europe that retirement benefits are traditionally provided through pensions, the Impaired Life Annuity product may be an important niche product to enhance the financial position of those who are already suffering chronic conditions when they reach retirement.

1 Editorial for the Newsletter on Health and Ageing (No. 16, April, 2007) of the Geneva Association (www.genevaassociation.org). This paper is based on a presentation given at the Geneva Association Conference in Vienna on Chronic Illnesses in November 2006 jointly with my former colleague, Dr. Olga Ruf-Fiedler. Another former colleague, Dr. Felix Rembges, greatly assisted in the preparation of the original presentation. My thanks to Dr. Christophe Courbage of the Geneva Association for his invitation to write this article and his advice and assistance.
Jeffrey King: Director of Riskman GmbH, a company specializing in risk management advice in Life Insurance Underwriting, claims and Product Design. E-mail: jking@jhk.ch.
2 Source: Bundesamt für Statistik, Schweiz.
3 Toyne, S. (2002): Ageing: “Europe’s Growing Problem”, BBC News/Business, 11 September.
4 G. Reday-Mulvey (2003): “Repenser les systèmes de pension par le vieillissement actif”, Presentation, Geneva Association Conference, 24 April, Brussels.
5 Health. USA 2006. US Department of Health and Human Services. www.cdc.gov/nchs/data/hus/hus06.pdf#summary.
6 Maynard, P. (2004): “Tele-underwriting: The Long Awaited Revolution”, Centaur Conference, April 2004, London, www.selectx.co.uk/
7 Friedrich, C. (2004): Long-Term Care-Combination Products. A Summary, April, Milliman Consultants and Actuaries, www.milliman.com/pubs/Life/content/research-reports/Long-Term-Care-Insurance-RR04-01-04.pdf
8 For further information see Hamdan, S. and Rinke, C. (1998): “Enhanced Annuities in the United Kingdom, Hannover Re’s Perspectives – Current Topics in International Life Insurance, Issue No. 2, 1998, www.hannoverlifere.com/resources/generic/publications.

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