INSTITUTE AND FACULTY OF ACTUARIES

EXAMINATION

19 April 2023 (am)

Subject SA1 – Health Care

Specialist Advanced
Time allowed: Three hours and twenty minutes

In addition to this paper you should have available the 2002 edition of
the Formulae and Tables and your own electronic calculator.

If you encounter any issues during the examination please contact the Assessment Team on
T. 0044 (0) 1865 268 873.

SA1 A2023 © Institute and Faculty of Actuaries

1 Country A is a large, rapidly developing country. There is significant variation
between regions in Country A in terms of population size and the level of personal
wealth of its citizens.

Historically, the government of Country A has provided limited health and care
benefits to its citizens in the form of a universal healthcare system. The universal
healthcare system meets the cost of medical treatment for its citizens, but there are
limits on both the type and cost of treatment provided.

The private health and care insurance sector in Country A has a small number of
health and care insurance companies.

The government in Country A carried out a recent study into sales of private health
and care insurance in Country A. The main conclusions of the study were as follows:

 The level of consumer take-up of private health and care insurance overall is very
low, compared to other equivalent countries.
 Only the very wealthiest citizens appear to buy health and care insurance
products.
 There is considerable variation in the health and care insurance business sold
between different regions.

(i) Suggest possible reasons for the low consumer take-up of private health and
care insurance in Country A. [5]

The government of Country A is aiming to increase levels of private health and care
insurance in Country A.

(ii) Suggest possible actions the government could take to achieve its aim. [5]

The government is now proposing to permit, for the first time, health and care
insurance companies based overseas, to sell into Country A.

(iii) Discuss the advantages and disadvantages of this proposal from the
perspective of the government. [5]

Following feedback from a wide range of stakeholders, the government has decided to
allow private health and care insurance companies in Country A to set up joint ventures
with health and care insurance companies based overseas. The joint ventures will
initially be subject to additional regulatory restrictions, which include the following:

 There will be additional scrutiny to ensure products sold are appropriate for
consumers in Country A.
 Joint ventures will initially only be allowed to sell accelerated critical illness and
major medical expenses insurance products in Country A.
 The initial term of any joint venture agreement will be 10 years. At the end of
10 years, there will be an option for both parties to extend the venture for a further
10 years. If either party does not wish to extend the venture, the domestic insurer
will take over the overseas company’s share of the joint venture liabilities in
return for a buyout payment.

SA1 A2023–2
 Company XYZ is a large multi-national health and care insurance company based
outside of Country A. Company XYZ is currently considering whether to enter into a
joint venture agreement with Company W, a health and care insurance company
based in a particular region of Country A.

(iv) Discuss the factors that Company XYZ should consider before deciding to
enter into the proposed joint venture. [20]

Following a detailed analysis of the proposed joint venture, Company XYZ has
agreed to set up the joint venture with Company W.

The one outstanding area of discussion are the terms of any buyout payment in the
event that either party does not want to extend the venture after 10 years.

(v) Discuss the possible considerations for Company W and Company XYZ in
determining the buyout payment. [10]
[Total 45]

SA1 A2023–3
2 In Country Z, the insurance industry sells only individual Stand-Alone Critical Illness
(SACI).

Policyholders, at the time of sale, have the choice to add a Return of Premium (RoP)
option to their SACI policy. If the policyholder chooses an RoP option, they will
receive a return of a specified amount of the premiums paid from the inception of the
policy to the date of a pre-specified event.

The policyholder can choose different RoP options where premiums are returned
dependent on different pre-specified events that can occur during the lifetime of the
policy.

The amount of premiums returned to the policyholder is dependent on the

pre-specified event covered under the option.

For example, if the customer adds a ‘cooling-off’ RoP option at the time of sale, the
‘RoP amount’ paid to the policyholder is equal to the premiums paid by the
policyholder up to the date of cancellation, if they cancel their policy up to 14 days
from the date the policy started.

(i) Describe four possible pre-specified events that an RoP option could be
based on. [4]

(ii) Discuss, with reasons, the factors that would be considered for calculating the
specified RoP amounts offered and in pricing the options. [7]

Around 70% of the sales of individual SACI sold in Country Z include at least one
type of RoP option. All SACI policies sold in Country Z are sold by Independent
Financial Advisors (IFAs). The addition of each RoP feature increases the premium
paid by the policyholder.

(iii) Discuss the different issues that an IFA should consider before recommending
an RoP option to one of their clients. [4]

SA1 A2023–4
 Within the market, different SACI policies are sold to individual adults, families and
children. The main features of these policies are set out in the table below:

Policy conditions Type of produce

Adult Family Child
Cover One adult. Up to two adults and One child.
two children.
Age Underwritten on Underwritten on Underwritten on
lives aged 17 and lives aged 17 and lives aged below
over. over. 15.
Claim conditions Partial claims reduce Partial claims No partial claims.
the sum insured and reduce the sum Termination upon
do not terminate the insured and do not full claim.
policy. terminate the
Termination upon policy. Termination
full claim. upon first full
claim.
Term Offered with terms Offered with terms Offered with terms
of 10, 15 and 20 of 10, 15 and 20 to expiry at age 18
years or to expiry at years. or at age 25.
age 65 or at age 100.
Other conditions Offered for personal At expiry age, there
or business purposes. is an option to
convert to an adult
policy without
underwriting.

(iv) Suggest, with reasons, which type of policy is most suitable for the following
clients:

A A high-net-worth 45-year-old doctor with his own medical practice

with no dependents
B A single parent on low income, with above-average savings, who has
two children aged 18 and 25 in further education
C A wealthy adult who already owns an adult individual critical illness
policy. She has four grandchildren under 5 years old and is currently
looking at inheritance planning.
[6]

(v) Discuss whether adding RoP options is in the policyholder’s best interests in
each case. [3]

The regulator in Country Z has expressed concerns over the prevalent use of RoP in
the market. The regulator is particularly concerned that:

 adding the RoP option is making SACI products unaffordable for policyholders.
 the cost of SACI with the RoP option is increasing the protection gap in
Country Z, where many individuals are already under-insured.

SA1 A2023–5
 The regulator in Country Z has called for industry participants to voluntarily cease the
use of RoP options. The marketing actuary at Insurer A has stated that there would be
consequences of being the first to do this.

(vi) Suggest what the possible consequences could be for the first insurer to cease
the use of RoP options in the market. [6]

The marketing actuary at Insurer A has suggested a phased approach where no RoP
options will be offered on SACI sales for sum insured values in the lowest quartile by
sum insured value from the industry in force statistics. This will remain or expand to
the next quartile after the impact is assessed at the end of the financial year.

(vii) Discuss the advantages and disadvantages of the marketing actuary’s

suggestion. [3]
[Total 33]

3 Country A’s healthcare system is serviced by private healthcare providers. A number

of health and care insurance companies operate in the market, and two insurance
products are available to individuals in Country A:

 hospital cash plans

 private medical insurance.

The government is looking to support individuals who are unable to afford health and
care insurance. It has proposed introducing a means-tested subsidy, the size of which
is dependent on the individual’s income. The government would pay the subsidy
directly to the healthcare provider.

(i) Discuss the government’s proposal from the point of view of:

(a) healthcare providers.

(b) customers.

(c) health and care insurers.

(d) the government of Country A.

[16]

A government adviser has suggested that the subsidy should be limited to inpatient
treatment only.

(ii) Describe the rationale for the adviser’s suggestion. [6]

[Total 22]

END OF PAPER

SA1 A2023–6