Independent financial advisers (IFAs) and intermediaries may not have any direct involvement with the work of reinsurers, but reinsurers have a huge impact on the business that advisers write.
Reinsurers are the backbone of insurance providing security, rating, pricing, product development and underwriting help. So the news that Swiss Re is to bow out of taking the risks involved with guaranteed premiums on critical illness (CI) contracts is not to be taken lightly.
Stephen McArthur, deputy chief executive at Swiss Re, explains the differences between the two types of CI rates that a reinsurer will write. Guaranteed rates are exactly that – guaranteed for a fixed term – while reviewable rates are looked at annually, “just like car insurance”.
McArthur says: “As risk-takers we have to have certainty in being able to predict the claims costs.”
“If you are going to take on a block of contracts the premium needs to be relatively certain so that you can estimate the costs and the number of claims, bearing in mind changes in medical science. You cannot increase the premium because it is fixed. We have had a 5% overall increase in the costs. We don’t have enough to cover that and don’t believe we should be exposing our shareholders to that type of uncertainty.”
Insurers who want a long-term guarantee will find a “shrinking marketplace” to place those risks, says McArthur.
“We offer a large proportion of the market capacity but I doubt that others will be prepared to take on the capacity,” he adds.
Time for a revamp
Many experts feel that now is a fortuitous time to revamp CI. But Helen Crofts, vice president at XL Re, says that as long as policyholders have a preference for guaranteed rates and life offices wish to provide products which meet their clients’ requirements, guaranteed CI rates will continue to be available, but at a higher price.
Crofts says: “We expect an increase in rates and more than likely a heightened awareness of the riskiness of this product line.”
“We believe it’s unlikely that products will be redesigned. More likely that other reinsurers will be sought.”
Intermediaries and IFAs have expressed concerns that Swiss Re’s main rival in the protection underwriting arena, GE Frankona Re, may follow suit.
Paul Casey, head of media relations at GE Frankona, says that the recent developments will not mark the death of CI guaranteed rates but he still takes a cautious approach. “We will look at the pricing issues facing the market and decide what to do,” he says.
Consumers are fans of the policies that have a guaranteed price and, as Eugene McCormack, product marketing manager at UnumProvident, rightly observes: “It’s nice to know that the price you are paying now will be the same in 10 years’ time.”
But he adds that if definitions fail to evolve in line with medical science, payouts will rise leading to higher premiums across the board.
Advances in screening and treatment now mean that conditions can be diagnosed in the early stages. Take prostate cancer, for example.
The Association of British Insurers’ (ABI) recently revised statement of best practice for CI cover says that only the more advanced or aggressive forms of the disease should be covered.
The definition for heart attack has also recently been amended to reflect the increasing use of the chemical test troponin to detect when a heart attack has taken place.
Under existing CI contracts policyholders may be entitled to a payout, even where very mild and highly treatable conditions are concerned.
McCormack predicts that the use of reviewable rates for CI policies will increase.
Second generation offering?
UnumProvident recently launched into the CI arena with a tiered benefit product called Elixia 123. The plan allows different levels of cover for different conditions, as well as multiple payouts. Some individuals may find it more affordable.
Nigel Bradshaw, managing director of Redmayne Consulting (which recently published a new report on the reinsurance market – Redmayne Report on Reassurance 2002) says that UnumProvident is “at least doing a good thing but [Elixia 123] is too close to the current product design to be a second generation CI offering”.
Rye Mills, IFA head of division at Liverpool Victoria, says that tiered benefits are inevitable. “Medical science is advancing so quickly and has a knock-on effect on the way that the insurance industry describes conditions. Some conditions are not as serious as they were five years ago and are usually survivable,” he says.
However, Roger Edwards, product development and marketing manager for the new protection business at Scottish Life, says that there are fundamental issues with regards to tiered benefits.
“These [tiered benefits] do not address the consumer’s or the professional adviser’s problem. They add an extra layer of complexity for consumers with regards to the differing degrees of severity.”
He adds: “I don’t think that IFAs and consumers are qualified to choose how much is paid out for a severe or mild cancer, for example. The IFA could recommend to the client that they take out 100% cover for a severe cancer.
“If the client is diagnosed with a mild type of cancer they will be told: ‘You only took out cover for a severe illness and this is not serious enough.’ Cancer is bound to frighten them and they will need treatment anyway and want a payout. It’s a difficult choice to make.”
Learning lessons from others Meanwhile, Perry Thomas, managing director at reinsurer RGA, says that the UK could learn some lessons from countries such as South Africa (where the CI product originated) and Australia.
He explains that the South African market does not offer guarantees because the risk is higher with regards to illnesses such as AIDS. In Australia the premiums and definitions are reviewed annually so the product remains up-to-date.
Both of these markets offer products which vary the amount that is paid out according to the severity of the illness. Many will pay out a proportion of the sum assured and the policyholder can keep the cover in case of another critical illness.
Thomas says that CI insurers need to go away and think of ways to improve the product. “In the UK our definitions are locked in a particular point in time but in 10 years’ time doctors will have to go back to the history books to find out for what purpose the definition was written. In effect, you are paying for something you cannot get when you need it.”
He is not confident that people know what they are buying and suggests that consumers are confused with regards to the purpose of CI insurance and total and permanent disability (TPD) cover.
He says: “What people think they are getting is disability insurance. The guaranteed product has some issues. Around 20% of claims are not paid because they don’t meet the definitions. A TPD is exactly that but people think they are going to get better and they are sold it as such.”
However, the market in Australia is not without its weaknesses. Thomas explains that about 50% of claimants are back at work within three months suggesting the condition was not that critical. It is this lottery element which causes the product to be more expensive than it needs to be.
Reinsurer Hannover Re has lots of ideas for product designs which aim to make the product more durable and more appropriate to the customer in the ever-changing world, particularly in view of changes to medical science, according to David Brand, deputy managing director at Hannover Re. That said, he is keeping his cards very close to his chest with regards to further details about these ideas.
Ronnie Martin, protection specialist at Legal & General, suggests some revamp ideas such as products where payments are received each month according to monthly expenditure rather than as a one-off lump sum. He says that this may be a more cost effective alternative.
Nigel Bradshaw, at Redmayne Consulting, says: “Insurers only carry 10-20% of the risk. They are more like sales and marketing companies. The real risk carriers are the reinsurers who carry 80-90% of the risk.”
“The reinsurers willing to guarantee rates cannot support the whole of the UK market so we will see more reviewable rates.”
Nick Kirwan, chairman of the Association of British Insurers’ (ABI) critical illness working party, says: “The question on everyone’s lips is: ‘is there enough capacity to absorb Swiss Re’s business?’ If there is enough capacity there will not be a huge impact on the market.
“But if there is not enough capacity then, potentially, that could signal the end of guaranteed rates for CI. But that’s a pessimistic view.”
He explains that reinsurers offer guarantees to insurers so that they can adequately reserve funds in order to meet future claims.
“The terrorist attacks [on New York] last year have had an impact on the cost of claims but it’s still important for consumers to protect themselves and CI insurance is growing. Advisers have worked hard to get the message across. Even if there is a move towards reviewable rates, I hope that it won’t stop people getting the cover they need,” he says.