What does this case of two jet-boat operators fighting for rights to use the Kawerau river have to do with insurance? It is the role of the expert witness that is of interest. The way some people talk about insurance sounds exactly like the way the Judge in this case described the testimony of the expert witness:
“took a generally negative stance on virtually every aspect” of Thunder Jet’s proposal rather than provide objective advice to the court. “In doing so, and by his own admission, Mr Cameron tended towards deliberate exaggeration of potential operating scenarios to support his opinions.”
If you are deliberately exaggerating some things, it stands to reason that you may be minimising others.
Consider Creutzfeldt – Jakob Disease for example. If you refer to Gen Re’s claim survey then the effective rate of incidence for CJD zero, but there are about 20 conditions in the same basket which effectively share all the “leftover” incidence after the top ten disorders. So in the QPR model, we use 0.41% which is the same rate we apply to all the non-core benefits, splitting the “leftover” incidence evenly. It is probably too high, but not by much.
On the other hand consider cancer: in Gen Re’s research between 2004 and 2008 the UK rate for males is identified as 50%, New Zealand’s is 57%. Both of those were prior to the introduction of much more generous heart attack definitions, which have since increased the weight of heart attack in the model and reduced the weight for cancer. Therefore in the QPR model today we use 43% (for males, we use 69% for females). Making the incidence weight appropriate to the expected claims makes sense.
If you may want to exaggerate the need for the weird and wonderful (such as CJD) each time you do so you reduce weighting for a good cancer definition in the model. If you are using a research tool which effectively weights cancer at 10% of the core benefits, then you are suggesting it is only about a quarter as important as it really is, for men, and only about one sixth, for women. That is the inevitable consequence of ‘talking up’ the outlying cases.
This distortion, effectively done so that you can tell a scarier story, is as unnecessary as it is misleading. I bought my trauma insurance because I am worried about the financial consequences of a critical illness. I am much more worried about the illnesses that several of my friends have had – cancer – than the ones they haven’t had – such as CJD. That is in spite of the fact that I have eaten meat in the UK during the period when there was a higher risk. Of course, if all other things are equal, then I will cheerfully buy the critical illness insurance that adds CJD (and a host of other things) at a low cost. But I won’t trade good definitions for cancer and heart attacks to achieve that.