Exclusions

Current practice in the income protection (IP) market is to apply exclusions (rather than applying ratings) for specific impairments. This is commonly done because the risk of future claim for that impairment may be very high, such that it would be unrealistic to apply a monetary rating that would adequately cover the risk.

To the customer, this approach is likely to appear unfair - they are getting reduced cover for the same price as someone getting full cover, so would it not be fairer to reduce their price? This is a practice that has been applied on critical illness contracts (for instance where a person has had cancer, an exclusion for future cancer claims is applied and a discount is given).

There are certainly arguments for giving lives with exclusions a discount on IP. As well as the fact that they are receiving reduced cover, this practice is likely to make the product more attractive to those with pre-existing conditions and bring people into insurance that would not have considered it as an option. A small number of companies have now started offering this type of discount for IP. But what are the issues that companies should consider in following this approach?

The two major areas where a discount might be considered are those where exclusions are most commonly applied and yet are common causes of claim i.e. mental health and musculo-skeletal problems. These are major causes of claim - a portfolio could typically experience 20% of its claims from mental illness and perhaps 15% plus from musculo-skeletal problems. For premiums to be reduced enough for the reduction in premiums to balance the reduction in cover the assumption must be made that those who have these exclusions applied represent standard risks in all other respects. If this is not the case then companies will potentially have to make complex commercial judgements about the balance of portfolios and the risk to the company.

Mental health exclusions

It has long been acknowledged that the physical health of those with severe and enduring mental health problems is poor. The combination of smoking, sedentary lifestyle and poor motivation to seek healthcare has been a major theme of secondary mental healthcare for a number of years. This group are clearly not standard risks but, as these people generally fall into the category of being long-term sick, we expect that few will be applying for disability insurance. Therefore, this is not a major issue when considering the argument for discounts on exclusions.

If we look at people with mental illness who might apply for insurance there are many studies that explore the relationship between depression and other causes of illness. The relationship between vascular disease and depression is perhaps the most comprehensively studied. This is an important relationship when you consider that depression is the most disabling disease worldwide and coronary artery disease is the most lethal illness worldwide. It has been a consistent finding that those who experienced depressive symptoms are at greater risk of developing both coronary artery problems and stroke. An example is one study that found that over a 16-year follow up those with depression had a relative risk of future stroke of 1.73. This was even more marked for black persons, with a relative risk of 2.6.

In addition, to the prospective risk of developing vascular disease, those who experience depression at the time of their stroke or myocardial infarction (MI) are more likely to have worse outcomes than those that do not. For example, in Canada those with depression following an MI were more likely to undergo coronary catheterisation and require invasive coronary intervention within a month of the infarct and more likely to be readmitted to hospital with complications.

The effect of depression in these cases appears to last up to a year. One of the major risk factors for developing depression in these circumstances is a past history of depression.
Some of this effect is mediated through a mechanism that is common to many chronic diseases, the ‘depression-disability spiral'. Depressed subjects with coronary heart disease experience more physical limitation, more frequent angina, and poorer quality of life. As the depression is treated so these parameters improve. Much of the outcome of rehabilitation depends upon the motivations and mind set of the individual. It is easy to see how depression would impede the process leading to further failure and a further lowering of mood.

The findings that depression is very common following a life threatening illness is perhaps understandable but there is also evidence of excess of other chronic illnesses, hypertension, pulmonary disease, arthritis, asthma, back pain and migraine developing in those who have a history of depression for whom the ‘depression-disability spiral' can easily become a reality. The effects of depression upon the average duration of absence from work in a number of common conditions can be seen in figure one.

The conclusion from the medical literature is that those who have experienced depression do not represent standard risks for IP. Even once the mental health problems are excluded there are considerable risks in other areas of health. This is likely to lead to both higher incidence rates and longer claims in payment for these lives.

Musculo-skeletal exclusion

Musculo-skeletal problems cover a number of different conditions and many different types of exclusion are applied depending on the site of the complaint and/or the type of condition. Back problems are very common in the population at large and are a common source of IP claims. Here we consider the effect of offering discounts for a total spinal exclusion, where the policyholder would be excluded from claiming under a reasonable proportion of IP claims.

It has already been noted that there is an increased risk of people with depression developing back problems, but it is also the case that those with back pain very commonly experience depression. In the USA, 23% of those with lower back pain are ‘frequently depressed and anxious'. When the pain extends to the neck the rate rises to 40%. In the control population for this study the rate, by comparison, was only 10%. This same group also showed an excess compared to the controls of respiratory conditions, cardiovascular abnormalities, stomach ulcers, inflammatory bowel problems other forms of chronic pain, cancer and diabetes.

Co-morbid problems have been identified in up to 87% of those with chronic spinal pain, including mental disorders (35%), chronic physical conditions (55%) and other foci of chronic pain (69%). The longer the person has experienced the back problem the more likely they are to develop co-morbid conditions. It is also important to note that the health expenditure of those who experience back problems is greater than those who do not - once the costs of managing the back pain are removed. Figure three shows how the depression-disability cycle functions in back pain.

While there are definitive statistics on the relationship with back pain and depression, there is also a potential issue that people with these exclusions will, naturally, not be able to claim for further episodes of back pain. Therefore, will they aim to find other causes of claim on a future episode - stress and mental illness perhaps being the most obvious?

Conclusions

The prima facia case for reducing the premiums for IP applicants who are subject to exclusions is attractive. However, medical literature suggests that those who experience mental health and spinal problems and hence attract exclusions at underwriting, cannot be regarded as standard lives in all other respects, for three reasons:

• They have an increased likelihood of developing other conditions.
• If they do develop other conditions, their claim may last longer than you would expect for standard lives.
• The possibility that they may be able, in some circumstances, to claim on a non-excluded condition even though the primary cause of disability is due to the excluded condition.

Taking everything into account, it is likely that lives with exclusions will exhibit worse morbidity than standard lives. While it is difficult to say precisely how much worse the morbidity may be, it is likely to significantly reduce any price benefit gained due to the life being unable to claim under the excluded condition and could even justify a loading plus exclusion for these lives (an approach which applies in the US market).

Joan Coverson is regional chief actuary at Gen Re and Chris Ball is CMO at Gen Re