Written primarily on a term or whole of life basis, critical illness (CI) cover has so far avoided the rising premiums that have dogged annually renewable products such as private medical insurance.
But, as many of the earliest CI whole of life plans were written at the start of the 1990s, for review after ten years, the market could soon see major premium changes for the first time.
Most providers wrote these earliest whole-life CI plans on ‘maximum’ terms – which means clients pay the minimum possible premium for the highest possible sum assured. The majority of plans are unit-linked, allowing policyholders to choose the proportion of premium that goes towards cover and the amount that rolls up over the ten-year period in an investment fund.
The sum assured is set for the first ten years on the basis of an assumed growth rate (usually 7.5 per cent) of the units in the fund to which the contract is linked. At the end of the ten-year period, insurers review the policy to see how actual growth rate compares with the assumed, to determine whether the value of the units in the fund is sufficient to maintain the sum assured. If actual growth is higher than assumed, the sum assured can be increased; if lower, either the sum assured is reduced or the premium correspondingly increased.
Although it is difficult to make general predictions about ten-year reviews, as premium changes will ultimately depend on individual policies and how well the underlying investment performs, industry insiders believe the signs are positive. Some companies have already gone through a similar review process for other whole-life unit-linked products and report that original margins built into plans proved flexible enough to maintain similar premium levels.
Scottish Provident product marketing manager (protection) Roger Edwards says the company is in the process of reviewing its whole-life life assurance policies, which it launched in 1986. “Even on maximum sum assured plans, we haven’t seen much in the way of premium increases,” he says. “We built in sufficient margins to ensure this would be the case and predict a similar trend with our whole of life CI plans. The maximum basis quotes on our early CI products were calculated to ensure a projected value of thousands of pounds after ten years to cushion against premium increases.”
Protection specialist IFA Brian Lentz, from Portfolio Insurance Consultancy, points to relatively good CI claims experience across providers as another reason why the upcoming reviews should not mean major price hikes.
“We haven’t seen a huge upturn in the number of claims and I don’t think experience has been much worse than insurers would have anticipated ten years ago,” he says. “The only miscalculation was for multiple sclerosis – the number of claims led to this becoming a core CI condition – and we would only see a major shift in general experience if there was an outbreak of human-variant CJD. Underlying investment performance, for me, is the only major reason why premiums could change at review stage.”
But despite this positive CI claims experience, and most providers claiming to have met investment targets, many still predict slight increases come review time.
Skandia Life launched its first whole-life CI policies in May 1991 and so is among those gearing up for the first ten-year review. The company’s life marketing manager Lynda Cox says the biggest problems surrounding the review process come from people’s expectations of a whole-life policy.
“To a layman, whole of life means just that,” she says. “Many of the people who bought these policies ten years ago don’t expect to have to go through a major policy review that could alter premiums significantly. We have to look at the money built up in the kitty and calculate what rate will support the maximum sum assured for a further period, which can obviously mean premium increases if a unit-linked plan has been set up badly.”
As with most providers, Cox believes the margins built into Skandia Life’s plans are lenient enough to safeguard against large increases. She says the company learnt from its whole-life life assurance, on which margins were smaller and, therefore, at review stage: premium hikes bigger. “That said,” she adds, “I do predict some premium increases on our whole of life CI simply because policyholders are ten years older. But, as 60 per cent of our clients increase their payments voluntarily year on year to push up their sum assured, I don’t see a small increase making much difference – the policy will just roll on as it always has.”
As for Bupa’s whole of life standard cover CI plan, deputy actuary Alasdair MacDonald reports good news on the morbidity and investment front and so predicts little change in premiums. With the company’s maximum cover whole-life CI, however, which somewhat confusingly is not unit-linked but just written over a ten-year term, he forecasts premiums will as much as double to offset the policyholder getting ten years older.
He says: “In general, the consequences of large premium hikes would be anti-selective lapses in the market – ‘healthy’ people will decide not to renew while ‘ill’ people will want to, which will inevitably impact badly on claims experience. But newer players in the CI market, such as Bupa, will have an advantage over more established CI providers, as the later entrants were able to start out with more competitive rates.”
Such potential problems and price hikes have lead to a decline in whole of life unit-linked CI policies over the past few years. Permanent Insurance and Royal & SunAlliance have both withdrawn such plans from new business. And Scottish Provident has seen a major shift away from whole-life to term products, which now make up most of its CI book.
Permanent sales and marketing manager Rod Macdonald points to the uneasy mix, in unit-linked plans, between protection and investment. “Many IFAs believe their clients should not combine the two,” he says. “They advise people to get the best of both areas individually rather than something that tries to pull them together.”
Other insiders believe that term assurance is just a simpler proposition for intermediaries to explain to clients. With a term CI policy, an adviser can basically say that if you pay x and fall ill within this term, you will get y amount of money. With whole-life unit-linked plans, they have to deal with fund performance, growth expectations, ten-year reviews, and various other variables.
But most specialist protection IFAs, such as Lentz, are strong advocates of whole of life CI rather than term. “Nobody knows when they are going to fall ill,” he says, “so how can you put a specific time limit on protection cover.
“People often set terms for the duration of the mortgage or until they retire, but they don’t just stop needing cover at the end of this time. The typical complaint about whole of life centres on the reviewable premiums and you can’t get around them – but there is no end-date on the protection and you don’t have to guess when you might fall ill.”
Cox says whole of life cover presents clients with a situation in which they can hardly fail to benefit. Whereas at the end of a specified CI term, a policyholder has to buy another policy subject to medical evidence, a whole of life plan allows people to guarantee their insurability for life.
“If your health is the same or improved at the end of ten years, you can improve your contract or even get your protection re-broked,” says Cox. “If your health has taken a turn for the worse, the existing provider has to reinsure you without taking this poor health into account.”
So whole-life CI policies do have advantages over term, despite their dreaded premium review – and even this presents everyone concerned with an opportunity according to Scottish Mutual Pegasus product development manager Nick Kirwan.
He says: “The industry is talking about these policy reviews in the wrong way – as something they have to do to policyholders rather than for them. But the review actually presents a chance to have a look at whether a policy written ten years ago still offers the most appropriate cover.”
Kirwan gives the example of someone who bought a whole of life CI policy when they were 30 and perhaps had a large mortgage to pay off. At that stage of proceedings, maximum terms (maximum sum assured for minimum premium) is most suitable, but, ten years later, perhaps the person is more financially secure, has a young family and wants different things from their protection.
“The ten-year review gives the opportunity to look at the whole policy rather than just the premium,” adds Kirwan. “If companies just say to their policyholders that they will have to pay however much more a month or year, that’s a recipe for customers going elsewhere.”
Although many providers started writing whole-life CI business closer to the mid-90s, and therefore still have a few years until renewal, most are looking into the ramifications now. Royal & SunAlliance IFA personal market leader Mark Edwards admitted that, as RSA launched its universal protection product in 1994 (and has since withdrawn it from new business), he had not yet began looking into forthcoming renewals – which he intends to rectify with immediate effect.
“If providers are as customer-focused as we claim to be, we have to be thinking about what could happen two or three years down the line and what this might mean for policyholders,” he says. “Whether it’s true or not, there is a general perception that people have not been treated well over the recent endowment situation, and no one wants that kind of bad publicity for the protection market.”