Evolution has seen critical illness (CI) policies transform. Traditionally a bolt-on to mortgage products, stand alone CI policies are gaining increasing popularity from a working population which is all too aware that serious illness could spell financial disaster.
Recent studies show that there were record numbers of CI products sold last year, but while the individual market is showing dramatic gains, the group critical illness (GCI) market has yet to ignite. Sales of the group products were up by 40 per cent last year but it was 40 per cent of a sector which is still embryonic.
Individual policy sales were at a record level of 694,263 last year, while group products were estimated to cover just 50,000 employees. But a report by Swiss Life shows that the majority of these group policies were genuine new business, rather than existing policies switched from other providers.
But there is a fair amount of confidence from providers that the market is set to continue growing, and they can envisage a time when critical illness will become as standard in an employee’s contract as annual leave.
The major players believe that group schemes will finally realise their obvious potential because of the ways in which the products are constructed and marketed.
Market analyst at ERC Frankona, Peter Fenner, says this potential will be achieved – although it will be a case of steady year-on-year gains rather than a sudden explosion of policies.
“At present the GCI market is popular at the two extreme ends of the spectrum. Obviously, at the executive end, a CI scheme is seen as a benefit, but there are also smaller companies which are taking out the scheme for all employees.”
Fenner adds that although the market is small, when the volume of companies buying the scheme increases, employees will begin to expect CI cover.
The use of pre-existing conditions will also enable the group market to enjoy a significant advantage over the individual CI sector. “If a person has suffered a heart attack it could be that they would simply be unable to obtain cover on an individual basis,” Fenner explains. “Whereas in a group policy, where the pre-existing conditions clause is inserted, they would be covered for the range of other illnesses.
“It would speed up the underwriting process for the company, enable the insurers not to require detailed medical answers from all staff, and ensure that, should staff come and go, they would be able to simply enjoy the cover there and then. It would be quicker, require less paperwork and therefore be cheaper.”
The responsibility lies with brokers and providers to ensure that employees and managers of the client company fully understand the pre-existing conditions clause. As Fenner says: “It would not be good enough simply to bring out the policy when a claim was about to be made.”
The government could also add impetus to the group market if it chose to make critical illness a taxable benefit in kind for staff. Fenner feels that this could make it a bit more attractive: “It would give the market a push but I do not think it would be the catalyst for any sizeable change.”
In terms of product design, a tiered product is also a potential market stimulator. Employers may find this an attractive alternative to the current blanket sum for a critical illness.
“There is often the fear that the employer could suffer a critical illness, such as a heart attack in a mild form, and be presented with a sizeable amount of money on which they could effectively retire.”
Fenner explains the benefits of a tiered scheme “If a scheme could be put into place which gave a clearly defined scale of payment for the severity of the illness it could reduce costs to the client, give them peace of mind that staff would be covered, but avoid handing them a large sum of money on which they could take early retirement.”
Stakeholder pension schemes could prove a barrier for GCI products because there is a danger that companies will feel that as they are lawfully bound to provide pension access, they will not be able to afford to purchase other benefits.
The future, says Fenner, lies with the brokers and IFAs, and increasing numbers are looking at the corporate market. “Surprisingly it is not the traditional employee benefit providers who are pushing the product,” he says. “We have seen a number of new entrants who see CI as a solid foothold into the corporate market.”
A more blunt summary of the market’s problems comes from Guardian Employee Benefit’s marketing manager, Brian Rawle. “The major problem we have as providers is that the employers do not perceive any benefit to the business,” he says. “They look at the product and ask: `How does this benefit me and my business as an employer?’ There is little doubt that if the market is to be enhanced then the products have to be reshaped and redefined. The challenge is trying to provide a product which supports the business aims.”
Rawle feels that alterations to the way payments are made may be justified. He uses the example of an employee who, after undergoing a heart by-pass, collects a large lump sum, then returns to work eight weeks later. “There is a case for a smaller lump sum at the start of the illness that can pay for the essentials,” Rawle suggests, “and then a staged instalment plan for a fixed term, which would phase the benefits.”
He adds: “One sure thing is the market at the moment is not fulfilling the needs of the client and we have to change the way the product is presented and designed if we want to grow the sector.”
Group risk marketing manager for Royal & Sun Alliance, Peter Anderson believes the market needs extra impetus. “The annual premium income for GCI last year was around £4m,” he says. “The premium income for death in service cover for last year was something like £60m, which goes to highlight the potential the market has for growth.”
He adds: “I would describe the current market as sluggish. It could be that employers are looking for a new kind of benefit or that brokers are struggling to get the message across.”
Anderson believes that there could now be a case for changing the type of benefit which is given within the products. He suggests that a lump sum of four times the employee’s salary is not always necessary. “It could be for some that a four times salary scheme is the wrong type of benefit. It is a level of windfall which cuts both ways,” he says. “The product is not expensive unless you are talking big numbers but employers may want to see some changes to products.”
Stakeholder schemes, according to Anderson, could open the door for both providers and IFAs when it came to getting access to clients. “It is at least getting IFAs through the front door,” he says. “The market should look to use the scheme as a platform for the offer of other financial services products such as GCL”
So the potential is there. But the future depends on providers and IFAs working together to innovate a product which satisfies the company and its staff alike.