Just imagine medicine in 10 years’ time. Angioplasty, a procedure used to unclog blood routes which sparks claims on critical illness (CI) policies, could be a common preventative measure for middle age – a routine procedure to nip heart disease in the bud. Then think how many CI policyholders might win the full jackpot of £250,000 or more.
The insurers are already picturing this scenario and looking for ways to keep CI specific throughout its term. As far as the providers and reassurers are concerned, CI cover is intended to help someone get over the trauma of a serious disease, but medical advances may already be turning it into a windfall product.
The concept of CI is simple – get one of a number of defined illnesses and you get the cash. But what was once a high risk CI condition could become easily curable in the future. So is it time for providers to take this into account and offer different levels of benefit to match the severity of the disease? Tiered benefits are certainly the subject of great debate in the CI camp.
For most policies on the market today, it is the same cash payout for either a small angioplasty procedure or for someone paralysed from the neck down. And with 14,000 angioplasties carried out each year and the British Heart Foundation saying this number is increasing by 13 per cent annually – it is a nice little earner for just an afternoon in hospital for those with a CI policy. But how can providers keep insurance cover up to date when medical advances are moving at such a pace?
ERC Frankona marketing analyst Paul Casey says: “The UK market has not yet taken to the tiering of CI benefits – and it doesn’t look as if this will change in the short term. Providers have been offering 100 per cent for all covered conditions, and the cost savings for a tiered product are not enormous, so it will take a very persuasive broker to convince a client to opt for the lower paying package.”
It will also be a brave insurer which introduces the first tiered product – so it looks as if the industry will need to move together, if at all.
Having said all this, Casey agrees the tiered product is more equitable and better serves the needs of anyone seeking insurance.
And it should not be forgotten that this is a protection product. If just a proportion of the benefit is used for a claim, then it could make sense to keep the residual amount for any future claim, maybe for another illness, a relapse or as a death benefit. And this could be achieved without altering many people’s claims experience. The top four causes of claim account for 89 per cent of all current claims at the moment, these would remain as 100 per cent benefit payouts even under a tiered system.
But big problems do lie ahead. There are those in the industry whose job it is to peer deeply into tea leaves and crystal balls – and they are concerned for the uncharted waters of the future, where medical advances might make a mockery of today’s protection policies.
Look at a parallel product for a moment. Once-bitten-twice-shy underwriters of income protection (IP) are currently paying out guaranteed claims originally intended to be reduced by income tax (which is no longer levied). With claimants being paid far more to stay at home than to go back to work now, it is easy to see why healthcare underwriters are so nervous about unknown factors. They are already looking ahead – and abroad.
Tiered benefits are already operating overseas, with 25 per cent of the benefit paid for a treatable cancer and 100 per cent for a life threatening one, and the UK market could well move in this direction over the next decade.
Hannover Life Re deputy actuary Debbie Whatthey says the UK industry may look at tiered benefits as part of future product development, but as a way of keeping benefits affordable, rather than to restrict cover. And even this, she says, is some way off. “Claims experience emerging today does not indicate a pressing need for this kind of benefit structure, but, with advances in medical technology, particularly diagnostic techniques, tiered benefits may be a way of protecting future experience,” she says.
Tiered benefits are predicted to reduce the product cost for the client, and ERC Frankona forecasts premium reductions of around 15 per cent for a typical 25 year term stand-alone policy for a 40-year-old male.
However, the industry is less concerned with reducing premiums now and more worried about controlling escalating claims in the future.
According to Hannover Life Re, an anticipated rise in CI claims could come about if improved screening is introduced in the UK. When New York State was screened for prostate cancer there was a 40 per cent increase in the identified cancers. Such a move here, which has been muted but not implemented, could throw up a wave of new claims.
Certainly it looks as if the writing is on the wall for reassurers. Swiss Re health business manager Sue Elliot agrees there are a lot of plusses to having benefits based on the degree of severity. “Number one, it can reduce the premium. Number two, from the insurer’s perspective, it makes you less open to anti-selection,” she says.
But how would tiered claims work in practice? Just who decides the severity of an illness, and is the percentage of the insured benefit fixed in the policy or is it left floating for the provider to amend globally as medicine progresses?
The thinking at this stage is that the policy should refer to classifications of severity but not define them, leaving the medical professionals to reflect ongoing changes in screening, diagnosis and treatment of disease.
But such a move would have other, negative, effects.
“Unfortunately,” says Elliot, “the windfall nature has been one of the selling points of CI – plus its simplicity and clarity of coverage.”
And these will almost certainly disappear if tiered benefits become the norm.
This, surely, is the big downside to the whole argument. Association of Independent Financial Advisers director of policy Faye Goddard says anything which complicates the product will not be welcomed.
“I feel we have got clarity now the core conditions are sorted out and this will muddy the waters again. Various tiering systems through different providers could make it extremely difficult to source the best product for the client and leave the adviser vulnerable again,” she says.
And Goddard isn’t the only one who sees tiering as a backward step. Brian Lentz of Portfolio Insurance Consultancy says: “Frankly, if they bring in tiered benefits it will hurt the market because the whole point, which the public accepts, and likes, and embraces about CI, is that it does not matter about the severity of your heart attack. The fact that you have had one means you get paid with no argument. I’m afraid the logic of tiered benefits escapes me.”
What people really need, many agree, is IP but that is a cumbersome product which is consequently undersold. With CI plans now beating IP by 3 to 1, it is probably the uncomplicated nature of the product which is its best feature. So we remove this main attraction at our peril.
But perhaps there is a better way of looking at it. Knowing human nature, as we do, and acknowledging the pulling power of the CI gamble, should we not be developing a product which pays 100 per cent for a modest claim, 200 per cent for one more severe, 300 per cent if it’s really quite serious – you get the drift. Sounds much sexier, doesn’t it?