Papers devoted to the subject of reserving for Permanent Health Insurance (PHI) are not exactly numerous. The author could not find one published in the U.K., although there were papers in the U.S.A., Australia and South Africa.

Most U.K. PHI papers have sought to cover the topic in its entirety and therefore do give views on reserving issues. Ironically, this paper in seeking to focus on reserving did, incidentally, find itself wandering over a large part of the PHI actuarial countryside. Perhaps this is unavoidable.

PHI reserving is not just a question of ensuring adequate solvency. The reserving basis we choose can aid or hinder our understanding of the business. After all, the recognition of profits is defined by the reserving basis. If management is going to track profits in order to assist decisions on marketing position, financial strength of the office, etc. then it needs to be concerned that the reserving basis is not distorting the emerging results. An equivalent argument can be put forward in respect of the capital requirements of the business.

In the past three decades there have been many efforts at removing discrimination between people on grounds of sex, both in legislation and in practice. It has come to be accepted that, apart from certain excluded areas, men and women should have equal opportunities and equal rights in equivalent circumstances. This ‘principle of equal treatment’ of the sexes means, amongst other things, that there must be equal rewards for the same work.

Legal effect to these concepts was given by the Equal Pay Act 1970 and the Sex Discrimination Act 1975, both of which excluded from their ambit provision in respect of death or retirement and statutory instruments then in force (e.g. the Social Security Acts, which enshrine unequal State pensionable ages).

In 1986, Helen Marshall successfully won her case before the European Court, that she should have the right to the same contractual retirement age as her male colleagues. As a result, the Sex Discrimination Act 1986 modified the ‘death or retirement’ exclusions of the 1975 Act to provide that one sex cannot be compulsorily retired before the other but retained the exception that permits one sex to have an earlier normal pension age.

This paper is about financial products which meet the healthcare costs of the elderly. It covers products that include elements of housing and healthcare provision, as well as insurance products with financial benefits that meet or reduce the cost of healthcare. It is hoped that the paper will be of interest to property developers and managers of retirement housing and nursing homes, as well as to the actuarial profession and the financial services community.

The paper introduces some of the areas that the author has researched and worked in over the past three years. During the same period, many insurance companies and developers are known to have researched the market for financial products which cover the cost of healthcare for the elderly. Demographic changes, coupled with more widespread home ownership and occupational pensions, have created a major opportunity for new products. Continuation of these trends, and political and cultural changes away from State provision, suggest that the need for new products will grow. In the U.S.A., similar trends have led to a rapidly growing market for many products combining finance and healthcare for the elderly. In the U.K., the market has been slower to respond to the opportunities.

A Dread Disease contract pays out a lump sum on the diagnosis of any of a number of specified diseases. Those most commonly covered are heart attack, coronary artery disease requiring surgery, cancer and stroke. The benefit can take either of two main forms—it may provide an acceleration of all or part of any death benefit or it may be an additional benefit. It can be sold in conjunction with many conventional products or as a stand-alone policy.

Dread Disease contracts were originally developed in South Africa in the early 1980's, although cancer riders had previously been sold in the U.S.A., Japan and Israel. To some extent the marketing of these contracts was insensitive and preyed on people's fears in a distasteful way. This may explain some initial reluctance amongst U.K. insurers to enter this market; however with marketing literature now emphasizing more positive aspects, this appears to have been overcome.

Throughout this century we have become accustomed to regular improvement in mortality rates at most ages. For life office actuaries this trend could be regarded as a potential source of profit for assurance business, but as a possible source of loss for annuities. However, since the movements in mortality were gradual then mortality rates at any given time could be estimated with a fair degree of confidence.

In this relatively stable environment, there was little concern over the first report of a death caused by complete and unaccountable failure of the immune system in the United States of America in 1981. When the number of such deaths began to grow and to migrate to Europe than actuaries had to take notice. Here was a disease (called AIDS) which was causing deaths at an alarmingly increasing rate and which medical science seemed powerless to counter. Concern grew about the effect which a major increase in mortality rates caused by AIDS would have on the financial health of life offices.