Critical illness insurance is a limited form of health insurance that pays a lump sum if a specified insured person is diagnosed with one of the specific life-threatening conditions identified in the policy. Critical illness insurance is sometimes combined with life insurance, in which the insurance policy pays out if the insured is diagnosed with a listed critical illness or when the insured dies, whichever comes first. Most critical illness policies cover advanced cases of cancer, severe heart attack, and stroke that result in irreversible symptoms. The Comprehensive Critical Illness Policy covers additional diseases such as Parkinson’s disease, multiple sclerosis, severe burns, bypass surgery, kidney failure, Alzheimer’s disease, angioplasty, vision loss, permanent hearing loss, and organ transplants. Some critical illness policies provide coverage for the loss of a limb. Most critical illness policies do not cover claims filed as a result of self-inflicted injury or alcohol or drug abuse.
Insurance is a contractual relationship that arises when one party (the insurer), for a fee (premium), agrees to compensate the other party (the insured) for losses caused to a certain subject (risk) caused by certain unforeseen circumstances (hazards or dangers). The term ‘guarantee’, commonly used in England, is considered synonymous with ‘insurance’.
The 10/10 Rule is a matter of analyzing and demonstrating the transfer of risk as a precondition for the use of reinsurance accounting, which was codified in the early 1990s with the adoption of Financial Accounting Standard (FAS) 113 (and its statutory counterpart, SSAP 62). FAS 113 itself was a response to alleged abuses and set the standard for testing whether something should be called an insurance contract. FAS 113 required that the transfer of risk be demonstrated by comparing the present value of the cash flows associated with the contract and, in particular, by exceeding certain thresholds of “significance” of risk. The thresholds, often referred to as the 9a and 9b tests, are: 9a. The reinsurer assumes significant insurance risk under the reinsured parts of the underlying insurance contracts. 9b. It is possible that the reinsurer could suffer a significant loss from the transaction. While neither “significant” nor “reasonably possible” was defined in this context, standard rules of thumb quickly emerged in the implementation of FAS 113. The most commonly cited is the “10/10 Rule”. This rule states that a contract reaches a threshold if there is at least a 10 percent chance that it will suffer a loss of 10 percent or more in present value (expressed as a percentage of the contract premium ceded).