If growth in premium income is a good measure of performance then insurers have every right to rank critical illness cover close to the top of wk–i6. the list of success stories of the past decade.
Since its introduction to the UK market 12 years ago, critical illness cover has enjoyed a meteoric rise in sales and there is no apparent reason why the fairy tale should end. Peter Kelly, life marketing director at Allied Dunbar explains: “It took off from a very slow start in 1986. In 1989 there were four product providers and only Abbey Life was having any real success. Now there are 60 to 70 companies in the market, many with multiple offerings”.
Insurers view the product in different ways. Avenda Burnell Walsh, marketing manager for Permanent Insurance is enthusiastic about its potential: “It is the term assurance of the nineties,” she says. “It is a modern fife cover, if you get a critical illness, you get the money instead of someone else getting it.”
Royal & Sun Alliance on the other hand has identified it a completely separate need to life cover. Marketing manager–life and health, Ronnie’ Martin says: “It is a separate need in addition to fife cover. There could be expenses in medical fees or alterations to your house. Critical illness cover allows you to review your lifestyle even though your income may have stopped.”
Whichever position they take, most companies will tell you that the number of policies sold in 1996 was double that of 1994, and although they are not confident that such enormous growth rates will continue, they are sure that figures for 1997 will see another healthy increase in sales.
Martin Chapman, product group manager-protection, at Norwich Union says: “1996 was an exceptional year. The number of policies sold was almost as many as the previous two years put together. We are not sure they will double again but we expect 1997 to be more than 1996.”
The good news for IFAs is that within this rapidly growing market, they are taking an increasing share of the business. Figures produced by M&G Re (now Swiss Re Life and Health) and LIMRA show that the percentage of critical illness sales made by IFAs and increased from 14.9% in 1991 to 29.7% in 1996. Industry estimates put the figure at just under 50% for last year. Initially direct sales forces stole the lead because IFAs were reluctant to get involved in such a complex product. “IFAs didn’t really feel confident about selling the product,” says Chapman. “After all they are IFAs not doctors and it is quite a technical product to sell.”
This problem was largely overcome when the IFA Association approved definitions which codified a precise definition for most of the popular causes of critical illness; cancer, heart disease, kidney failure, stroke, coronary bypass surgery, major organ transplant and total and permanent disability.
Many insurers have also taken the problems of the complexity of the product on board and are making efforts to keep them straightforward. “We try to keep conditions on our products as simple as possible,” says Chapman. “We have maintained a constant level of conditions within all four products to help IFAs give best advice.
Although most products on the market now come with extra conditions as insurers battle to differentiate their offerings, the pace of product development has now levelled out giving IFAs a better chance of frilly understanding the product range – a feat which a few months ago would have been almost impossible.
Chapman explains: “A couple of years ago most insurers were increasing conditions regularly now there are only a few conditions left that can be added on to a contract. The market has said `let’s consolidate and bed-in so the IFAs can get used to them’.”
With the market still growing and the products, for the moment at least, fairly stable, now could be the ideal time for IFAs to take their share of the action, although the methods used will have to be more inventive than in the past.
So far, almost all critical illness policies sold have been as a bolt-on to a mortgage or endowment policy. “It is the obvious way to sell it,” says Chapman. “It is a price issue, with an endowment policy the percentage of the premium for critical illness is very small.”
Allied Dunbar estimates 80% of the endowment policies it sells now have critical illness cover as an integral part of the product. Kelly says for those taking it out, it is a win-win situation. “You get cash at the end of the day, cash on early death and cash in the event of a critical illness.”
Critical illness cover can also be bolted on to life policies but this has not been such an easy sell, largely because of the decline in the life market overall. At present there are no obvious growth areas.
So IFAs will have to look further afield than simply selling it at the same time as a mortgage if they want to make the most of the market potential and with market penetration currently put at less than five percent of the working population there is certainly scope for more sales.
Allied Dunbar’s Kelly says there is still a lot of work to be done in educating clients about the need for critical illness cover. “IFA client banks are absolutely bereft of critical illness cover,” he says. “They need to get the message over to clients in a way they can understand.” Kelly points to the fact that Allied Dunbar, like other companies, produce case studies which can be used by IFAs to help educate clients.
Chapman says clients who would be targets for key man insurance should also consider critical illness as a stand alone product. “After all, it is business men who get stressed out and have heart attacks,” he says.
Despite its slow start, critical illness cover has gained full acceptance in the UK market, to the extent that some would argue that IFAs are failing in their duty if they do not offer it to clients. From the situation of a few years ago where IFAs did not offer the product for fear they may not be offering best advice, some say the table has now turned and the IFA could be at risk if he fails to offer the product at all.
Kelly explains: “If you have a client and you don’t talk about the fact that there is a critical illness product available and the client has a heart attack 18 months down the line, in today’s litigious society you are at a bigger risk than if you offer him the wrong plan.”
IFAs also need to keep a close eye on developments in critical illness cover. The pace of changes to products may have slowed down but there are developments in areas such as genetic testing.
The ABI issued a code of practice on the subject in December which stated that although insurers would not insists on genetic testing for those seeking cover, including critical illness, they will require existing test results to be given where relevant. The subject is far from closed though and will continue to be debated by Parliament this year.
A further development is the introduction of critical illness cover into the US during the past year. Some states are currently refusing to consider it for approval while others are requiring substantial changes to it. As insurance becomes increasingly international it is not impossible that developments in the US could have a knock-on effect here.
So it seems that the new, stable, easy-to-understand and even easier to sell critical illness products that are currently being marketed by insurers may not stay that straightforward nor will the potential market remain as untapped and lucrative. IFAs should make the most of it while they can.