The Road to Developing Critical Illness Insurance Under the New Regulations

Q&A with Tian Meipan, FSA, general manager of China Life Reinsurance Co., Ltd. January 2021

Photo: iStock.com/megatronservizi

On Nov. 5, 2020, the Specifications for the Use of Illness Definitions for Critical Illness Insurance (2020 Revised Edition) and the Critical Illness Empirical Incidence Rate Tables of China Life Insurance Industry (2020) were officially released. What changes were made in the new definitions and incidence rates? What impacts will they have on the critical illness insurance market, which contributes nearly 60 percent of health insurance premium income? What opportunities and challenges will the future health insurance market face in China?

The Actuary invited Tian Meipan, FSA, general manager of China Life Reinsurance Co., Ltd., to share his views on the development of critical illness insurance under the new regulations.

Why did the industry spend so much time and energy (nearly two years) studying the definitions of critical illness and the critical illness experience incidence tables? Why do you think the revisions to the regulations are necessary? What is the significance?

In our current life insurance market, critical illness insurance is the most important insurance product. It is an important carrier for implementing the Healthy China initiative, improving the medical security system and strengthening the protection function of insurance. Its development and evolution accompany the development of the insurance industry of the Chinese mainland.

Critical illness insurance is relevant today and has maintained long-term vitality because it has met the interests of multiple parties:

Consumers. Critical illness insurance uncovered the pain point of customers’ concerns about serious illnesses. The concept of “critical illnesses” has been deeply rooted in people’s hearts, which has guided and educated the market. In recent years, the product mix of a whole life product with a critical illness acceleration rider, which is very popular in the market, has met the public’s demand for return of premium (ROP).
Insurance companies. Due to this ROP design that meets customer needs, critical illness insurance has become one of the few product types that can contribute both premium incomes and embedded value.
Distribution channels. The high commission proportions and high market acceptance of critical illness insurance have made various distribution channels flock to it.

As a result of these reasons, we must work hard on the definitions and the incidence rates of critical illness and support the development of critical illness insurance and the total life insurance industry with sufficiently rigorous, standard definitions and accurate incidences.

From the point of necessity, clinical diagnostic standards and medical technology are constantly developing and becoming more innovative, so parts of the old specifications no longer meet the current industry development and consumer requirements. Therefore, the regulations needed to be revised and improved. For example, in the original definitions, coverage for coronary artery bypass grafting stipulated that “thoracotomy must be performed.” In the new definitions of critical illness, this language was removed and replaced with “pericardiotomy was performed.” This change has effectively improved the coverage level for consumers.

Correspondingly, the new incidence rate table scientifically and accurately determines the impact of each factor on the incidence rates through a combination of qualitative and quantitative methods, with quantitative analysis as the mainstay. On the other hand, the scale of critical illness insurance continues to expand, and a long time has passed since the last revision of the empirical incidence rates. Because of the innovation of medical technology and diagnostic methods, the spectrum and the incidences of diseases have changed dramatically, so reviews and updates must be carried out to prevent systemic risks.

The 2003 version of the definitions of critical illness and the 2013 version of the incidence rates set off waves of industrial development when they were released, boosting innovation in the development of health insurance, especially critical illness insurance. We now look forward and anticipate that these new changes from 2020 will continue to inject new power into the industry.

As an industry expert, you have presided over and participated in a lot of basic research and standard-setting projects, such as the first Critical Illness Empirical Incidence Rate Tables of China Life Insurance Industry and the third Life Tables of China Life Insurance Industry. How do you view the development of critical illness insurance in China?

The first critical illness product appeared in 1994 and has been developed for more than 20 years on the Chinese mainland. By 2019, the annual new business premium income of critical illness products exceeded 100 billion, with an annual growth rate of more than 30 percent.

There are many participants in critical illness products, and 77 of the 90+ life and health insurance companies in China provide them. At the same time, the concentration of critical illness business has been decreasing year by year, from the initial dominance of the market by a few companies to the development and sharing of the market by all entities more recently.

Since 2013, the development of critical illness insurance has entered the express lane. From the perspective of the supply side, the reasons are:

The reform of ordinary life insurance premiums has reduced the price of critical illness insurance products and released purchasing power.
The introduction of the industry’s first Critical Illness Empirical Incidence Rate Tables gave the industry a unified standard.
In 2013, the regulatory authorities simplified the agent qualification examination, which lowered the threshold for agent qualification. By the end of 2019, there were 9 million registered agents, which was comparable with the population of the 100^th country in terms of global population ranking.

On this basis, critical illness products are flourishing. This includes minor illness benefits, multiple payments, more diseases and many other product innovations at this stage. However, some problems have appeared. First of all, with the increase in the number of diseases, definitions of diseases are not very rigorous, which is likely to cause disputes in claims. For example, the sequelae of mild stroke in minor illness benefit has caused more serious risk problems due to loose definitions.

Additionally, advances in diagnostic technology have greatly increased the incidence rates (diagnosis rates) of certain diseases, and at the same time, the difficulty and costs of treatment have dropped significantly. Whether a type of disease should be classified as critical illnesses needs to be reviewed, such as stage I thyroid cancer.

The contradiction between the continuous increase in product complexity and the relative lag of actuarial technology is also problematic. In this regard, actuaries bear certain responsibilities. For example, an accurate database is missing for the simultaneous occurrence of multiple diseases for critical insurance products with multiple payments. Another example is minor illnesses. Both the relationship among minor illnesses and the relationship between minor illnesses and critical illnesses are difficult to define, and stochastic models need to be established. The actual prevalence of some minor illnesses is much higher than the empirical values we have observed. For example, the elderly suffer from a higher incidence of severe hearing loss. But since the population covered by insurance is not that old due to the late start of the Chinese mainland’s insurance industry, the true risk has not been revealed yet.

To give another example of the rigor of the definitions, for severe hand, foot and mouth disease, certain products require the diagnosis of the disease to include very detailed clinical symptoms and laboratory evidence of complications. Conversely, some products do not have such requirements as long as clinical diagnoses and complications exist. Therefore, the incidence of the disease varies greatly under different definitions. Generally speaking, this stage of development is extremely dynamic depending on the market, so there are certain issues. This is what we are trying to address in this revision of the definition and incidence rates.

The question about the essence and function of critical illness insurance is something we think about often. Is the nature of critical illness products with ROP riders more protection oriented or more savings oriented? These ideas influence the direction of the future development of critical illness products. In the short term, critical illness products meet the needs of different stakeholders such as customers, agents and companies and will continue to occupy a key position in the health insurance market. However, in the long run, the popularity of medical expense compensation insurance, such as the medical insurance with sum assured of million level in recent years, has awakened everyone’s perception of the high cost of medical treatment and the demand for protection-oriented insurance.

At the same time, as the public’s understanding of insurance and financial knowledge deepens, the shortcomings of savings-oriented critical insurance products for insufficient security at the aging stage have become more obvious. This type of insurance provides stronger security for the young, and its saving nature gradually strengthens over time while the nature of risk protection gradually decreases. So, it will face the challenge of the market. This makes it possible to further separate the functions of saving and risk protection in the future. Critical illness products are likely to be differentiated into different dedicated product responsibilities in the future, such as long-term disability products, long-term care insurance products and reimbursement medical products. The scope of population covered also will be further expanded, and future insurance will be able to cover more people with multiple life cycles.

Compared with the 2007 version of the definitions of critical illness and the 2013 version of the critical illness incidence rate table, what are the main changes in the new versions of definitions and incidence rates of critical illnesses?

Changes in the New Definitions

The revision of the definitions of critical illnesses is based on the overall principle of “scientific and standardized, conformed to reality and moderately forward-looking,” and the work objective is “optimizing the definitions of critical illnesses, optimizing types of diseases covered, optimizing the classification of critical illnesses and establishing a long-term effective mechanism,” which specifically reflects “five insistences.”

Insist on the people-centered concept, scientifically and reasonably standardize the definition items, and effectively protect and enhance consumers’ insurance benefits.
Insist on data analysis and quantitative evaluation as the basis, and the diseases included in the revised version of the specification meet the “significant” criteria in both the medical and economic sense.
Insist on the insurable characteristics of critical illness risks, including uncertainty, measurability and contingency.
Insist on the latest medical practice as the standard while fully considering the availability of claim practices.
Insist on the orientation of sustainable development and prevention of systemic risks while giving consideration to the foresight and timeliness of the definitions of critical illnesses.

The main changes can be divided into three categories:

A critical illness grading system has been established to classify the three core diseases of concern to the public—malignant tumors, acute myocardial infarction and stroke sequelae—into critical and minor grades according to their severity.
The original definitions of 25 critical diseases have been improved and grown to 28 critical diseases and three minor diseases. The coverage has been moderately expanded based on the critical disease evaluation model for quantification of disease severity as well as standardization and operability of disease definitions.
According to the latest medical progress, the scope of disease definitions has been expanded and the definitions have been optimized. Meanwhile, the formulation of definitions adopts quantifiable, objective or recognized standards as much as possible to reduce subjective judgments and make the identification of diseases clearer and more transparent.

Changes in the New Incidence Rates

The results achieved are:

Based on the new definitions of critical illness, the Critical Illness Empirical Incidence Rate Tables of Guangdong-Hong Kong-Macao Greater Bay Area were established to support China’s development strategy of the Greater Bay Area.
Two representative critical illness empirical incidence rate reference tables for advanced age under the new definitions of critical illnesses were established to further meet the health insurance needs of the elderly.
Based on updated data, the Critical Illness Empirical Incidence Rate Tables of China Life Insurance Industry (2020) on a nationwide scale were established under the new definitions of critical illnesses so as to further deepen the supply-side reform of health insurance.
A standard for data collection, verification and pathology of critical illness products was created to further consolidate the industry’s data foundation.
The Compilation Report of the Critical Illness Empirical Incidence Rate Tables of China Life Insurance Industry (2020) was released to provide better services for national medical and health research and national health education. About 2,900 illness insurance products were sorted out, 160 illnesses were extracted, and 370 million underwriting data and 5.87 million claims data were collected. The large scale and high quality of basic data is world-leading, providing a guarantee for the accurate calculation of empirical incidence rates.

Certain changes have occurred in this revision compared to the previous critical illness incidence tables in terms of both the curve shape and the incidence level. In particular, the scientific optimization of risk margins helps to make the pricing of critical illness products more scientific and rational. As malignant tumors are classified into mild and severe types under the new definitions, papillary or follicular thyroid cancer that originally belonged to the TNM stage of malignant tumors as T1N0M0 or less is classified as a mild malignant tumor. Because of this change, the incidence of critical malignant tumors decreases while the incidence of minor malignant tumors increases. At the same time, we also found the incidence of malignant tumors themselves has shown a certain natural empirical deterioration trend in recent years.

Based on the new regulations, what prospects do you have for the future development of critical illness insurance in China?

When we look at critical illness insurance, instead of viewing it separately we must treat it as a natural part of health insurance, and thus analyze and study the health insurance industry as a whole. The current health insurance market has developed rapidly. The annualized growth rate of premium incomes from 2014–2019 is as high as 35 percent, and it reached 530.2 billion CNY during the first seven months of 2020. The health insurance market is expected to maintain a growth rate of more than 30 percent, and the annual premium total will exceed 1 trillion CNY around 2021. This development also shows, thanks to the power of the internet, health insurance products that are upgraded continuously and more tailored to consumer needs are now accepted and recognized by consumers as national health awareness rises. Policies at both the national and industry levels have given a sufficient boost to the development of health insurance. The Guidelines on Promoting the Development of Commercial Insurance in Social Services jointly issued by the China Banking and Insurance Regulatory Commission (CBIRC) and 13 other government departments also clearly pointed out, “The target size of the health insurance market is to exceed 2 trillion CNY by 2025.”

The future potential of the health insurance market is huge. The problem of difficult and expensive medical treatment is still the public’s deepest concern, and the aging of the population constantly reminds the public to put enough crisis awareness into preventing future health risks. National medical expenditure has been increasing year by year, reaching 1.7 trillion CNY in 2018. Undoubtedly, it is health insurance that will fill this huge gap.

As part of the health industry, health insurance will face new opportunities as well as challenges brought on by a series of profound changes: reform of the Chinese Social Medical Insurance System, the linkage between health system reform and drug circulation system reform, drug quantity purchasing, zero-markup drug policy, the development of internet medical services and so on. When developing future health insurance products, it will be key to incorporate these changes and provide solutions for all participants.

Policy support has created an excellent environment for the development of health insurance. On March 5, 2020, the State Council issued the Opinions on Deepening the Reform of the Medical Security System (2020), stating: “By 2030, the medical security system will be fully established in which basic social medical insurance plays the role of mainstay, medical assistance plays the role of the back-up, and supplementary medical insurance, commercial health insurance, charitable donations and mutual medical assistance scheme develop jointly.” The insurance industry also has launched a series of policies on health insurance, including the new definitions and incidence rates of critical illness, which has created a good foundation for the vigorous development of the health industry.

Then, as far as critical illness insurance is concerned, although it is developing with a growing trend, it is still difficult for us to conclude whether this trend can be maintained. The emergence of medical insurance with sum assured of million level affects the development of critical illness products. Critical illness insurance is no longer the only optimal solution for everyone to cope with problems caused by serious illness. It is the responsibility of medical insurance to integrate with the medical and pharmaceutical industries.

At present, however, most life insurance companies are oriented by interest spreads and usually ignore risk management on mortality or morbidity spreads. In the future, with downward interest rate trends and an aging population, the proportion of risk protection will become larger gradually, and the importance of mortality or morbidity spreads will increase.

Whether the current profit model will be sustainable in the future is a problem. Therefore, in general, the healthy, sustainable and high-quality development of critical illness insurance depends on the ability to adapt to this change in the profit model, the degree of integration with the medical and pharmaceutical industries, as well as the continuous exploration of more subdivided functions of products beyond protection and saving.

What is the path and method of high-quality development of critical illness insurance or, more broadly, health insurance?

First, no matter how the environment and the market evolve, we must remain in awe of risks. This is also one of the important significances of our revision of the definitions and incidence rates of critical illness. From the perspective of the industry, it is necessary to continue to improve infrastructure construction and lay a solid foundation for the development of health insurance. From the perspective of insurance companies, it is necessary to plan business strategies in advance, create a layout focusing on the future profit model, establish long-term thinking and perform continuous management of long-term protection-oriented products.

Second, the insurance industry must be deeply integrated with the pharmaceutical and medical industries. At present, the payment ability of insurance has not been brought into play fully, and resources have not been properly allocated, especially in the sectors of pharmaceuticals, pension and nursing. In this regard, the original protection function of insurance should be utilized fully to expand the accessibility of advanced therapies via insurance payments. And in this process, we should continuously improve the voice of health insurance in the total health industry, so as to obtain intervention and resource allocation capabilities for customers (patients) and medical service providers.

Third, we must strengthen the application of insurance technologies and pay great attention to technology empowerment. In all aspects of pricing, product development, underwriting, sales and claim review, we need to rely on the power of technology to improve operational efficiency and effectively control risks.

Finally, we must pay great attention to communication with the international insurance industry, so as to learn from the operating experience of health insurance products, industrial integration business models with the health industry, and effective methods of risk management and control in developed insurance markets. In addition, I hope I can continue to participate in various SOA activities and enjoy more learning and communication opportunities.

Tian Meipan, FSA, is general manager of China Life Reinsurance Co., Ltd.