Protection advisers operating in the CI market face consolidation among providers, a depressed mortgage market and, with consumers still nervous about spending, a battle to recommend on quality rather than price. Edmund Tirbutt reports on an industry under pressure.
A reduction in provider numbers might have left the individual critical illness cover (CI) market with a shrinking feeling. But the jury remains out regarding whether this shake-up will ultimately prove beneficial or detrimental.
Skandia‘s withdrawal from CI in September 2010 will certainly be felt at the quality end of the market, especially as it was the only provider to offer “rolling term” cover – which has provided a valuable halfway house between term and whole-of-life. The company, which remains in the life market, does not rule out returning to CI in the future.
Phil Carroll, head of financial planning at Skandia, says: “We had been offering a quality niche market CI product, which was putting features before price, and the volumes of business we were writing didn’t fit in with where we want to be going at the moment. We had been in the market for10 years and had significant business increases to start with but these had dropped off. The market has moved more to price and we would prefer to be out of it for the time being while this situation continues and to review our future options.”
Royal Liver further reduced choice in September 2010 by closing Progress, its protection division, to new business. It reported that, due to capital constraints, the Society was not in a position to continue to invest in the long-term prospects of the Progress business.
Consolidation considerations
Many commentators also suggest that Bupa could not have been raking in too many profits from its protection business as it was prepared to sell out in February 2011 to Friends Provident’s parent Resolution, which had also acquired the majority of AXA Life’s protection business in September 2010. Resolution only has a licence to continue using the Bupa name for up to nine months, after which it intends to come up with a “best of breed” CI product for new business to replace those currently offered by all three of its protection subsidiaries. By the end of the first quarter of this year the best of AXA Life and Friends Provident will already be combined as Friends Life.
Steve Casey, head of sales and marketing at Bupa Individual Protection, says: “We expect to have a very compelling proposition by the end of the year, combining AXA’s competitiveness in a product which is market leader in terms of quality. We should benefit from economies of scale, which could include a possible improvement in our tax position and we may also be able to take a different position on reserving. There will be no teething problems as we are totally committed to maintaining service standards.”
Economies of scale have clearly been reaped following the 2008 acquisition of Scottish Provident by Bright Grey’s parent Royal London Group. The newly combined parties have achieved significantly better reinsurance rates on the grounds that Bright Grey’s high tech capability will be extended to Scottish Provident in the future. Nevertheless, in contrast to the stance taken by Resolution, Royal London has retained both the Bright Grey and Scottish Provident brands, and many commentators feel Resolution is making a mistake by not allowing the Bupa CI product to continue – although in practice Bupa is so precious about its name that it is almost inconceivable that it would have allowed any acquiring party to continue to use it in the long term.
Peter Chadborn, director of Essex-based independent financial adviser (IFA) Plan Money, says: “We still have a broad choice of CI providers compared to other markets around the world, so I am not averse to consolidation where it works. Best of breed can be useful if you have two players like Friends Provident and AXA which dovetail with each other.
“Friends Provident is strong in income protection [IP] and AXA will acknowledge that it is not. AXA is very effective in ‘Big T’ teleunderwriting and has one of the best menu plans but Friends Provident scores less well on both counts. However, Bupa has always had strength in its own right and to my mind can stand independently. It has always been at the quality end of the market in terms of CI product and brand, so its marriage with Friends Provident doesn’t sit too comfortably in my opinion.”
Bhupinder Anand, managing director of central London-based IFA Anand Associates, is another to express reservations about the Bupa acquisition, and feels that competition is a much better way of ensuring that the consumer has optimum value than achieving economies of scale through consolidation.
He says: “I really like the Bupa product. Although it’s rarely the cheapest it has often seemed to represent the best value when we have done cover comparisons. Lack of choice of providers is beginning to concern me in a marketplace that should be constantly innovating. Adviser options are becoming more limited and it would be distressing to see further consolidation because there’s a great deal of expertise in the CI sector spread among providers which are constantly pushing each other to innovate, and we are in danger of losing this impetus.”
Matt Morris, senior policy adviser at national specialist intermediary LifeSearch, stresses that decisions regarding which personnel are kept on are likely to prove crucial in determining whether the new Friends Life operation ends up proving a success or failure.
He says: “A lot of what makes providers good revolves around their underwriting stance and quality of customer service, and much of this boils down to who is in charge of the department. On the positive side, economies of scale could reduce rates but choice is always good, especially with CI as there is scope for differentiation, and the Bupa brand was one that consumers looked up to when mentioned.”
New developments
Let us not forget, however, that acquisitions and exits from the CI field are invariably followed by new entrants. For example, in 2007 Standard Life exited the market and Scottish Widows withdrew from industry quotation portals but these events have been more than offset by the launch of PruProtect in 2007 and the 2008 entry of Fortis Life, which changed its name to Ageas Protect this January as a result of BNP Paribas having bought the right to the Fortis name when acquiring the banking division.
There are currently constant rumours that a new player will shortly be entering the CI market and, if it makes anything like the impact that PruProtect has made, the Bupa brand may not in fact be missed for that long. PruProtect, which launched a new range of protection products this March (see page 16), already claims a 6% share of the IFA CI market and aims eventually to dominate in a similar way to Discovery’s pre-eminence in the South African market, where it has a 40% market share. It is intending to achieve this goal without getting involved with price wars but its competitiveness has been significantly enhanced since the launch of PruProtect Essentials in November 2009. This basically offers the same two levels of Serious Illness cover as the traditional PruProtect product but has no automatic cover for children, no guaranteed insurability options and the Vitality element doesn’t impact on premiums.
Ageas Protect has also made its mark with the launch of its innovative Low Start protection product this January. This offers the same level of cover as its YourLife Plan but gives customers the opportunity to buy much more protection for the premium they can afford today, with many getting 50% more. In future years premiums gradually increase at a rate guaranteed for the entire period of the cover.
Martin Werth, managing director of Ageas Protect, says: “In the current economic climate effective protection has become even more important, but consumers’ budgets are being squeezed. We have launched Low Start to help customers afford the protection they need now. It could also suit the large number of customers who buy protection just as they have the additional financial commitments associated with moving house or with having a new baby.”
With most established players, on the other hand, product news is limited to tinkering around the edges. Most commonly this has involved adding new conditions, enhancing wording of existing conditions to over and above Association of British Insurers (ABI) requirements or adding partial payment facilities for less severe conditions otherwise not covered by the policy.
Ben Heffer, insight analyst for life and protection at Defaqto, says: “Insurers are still adding definitions but the main focus is on the ‘ABI plus’ race, which is in full cry. Two or three years ago they were falling over themselves to add more illnesses but now the emphasis has really changed to improving definitions. I’m not necessarily an advocate of tinkering but if definitions are better it’s a good thing as it adds genuine value to the client.
Demand stabilising
Demand for CI has stabilised at around half a million policies a year. According to Swiss Re’s Term & Health Watch 2010, the 530,214 policies sold in 2009 represented a 3.8% increase over 2008, and it would be a surprise if the next Term & Health Watch shows any significant deterioration for 2010.
Early indications are that protection sales generally did pretty well during 2010 despite a sluggish mortgage market.
Not surprisingly, those insurers that sell primarily on price seem to have fared better than those that do not. Legal & General reports its IFA market share to have increased by 30% between the end of the third quarter of 2009 and the end of the third quarter of 2010 while Aviva is pleased that its new business volumes were largely flat during 2010 – as they had fallen by around 10% the previous year. On the other hand, Bright Grey and Scottish Provident, which place more emphasis on quality features and benefits, estimate that their combined CI sales fell by around 10% in 2010.
Ian Smart, head of product development and technical support at Bright Grey and Scottish Provident, says: “The market has been very tough because of the dip in the mortgage market and, whereas about half of our business was mortgage-related prior to the credit crunch, the proportion is now nearer a third. But we don’t believe that the mortgage market will continue to be as bad as some people are predicting, and some mortgage brokers and other intermediaries are reacting and trying to sell more CI for family protection and looking up clients with mortgages who didn’t have CI in the first place.
Obviously the ruling this March by the European Court of Justice that will prevent insurers from using gender as a basis for calculating premiums with effect from December 2012 is going to do little to help pricing (see pages 20-21). Many commentators fear that protection rates generally will rise across the board as insurance companies try to build in the new risk and have to update their systems.
Even without this ruling, Henrietta Oxlade, an IFA with City-based Bond Wealth Management, confirms that price often tends to be a major issue at present, especially once clients have reached their late 30s and the premiums involved have become much steeper. She recalls in particular a recent meeting with a 38 year-old male smoker she had quoted for on a number of options.
“He pointed out that the life cover had terminal illness cover that paid out the sum assured if you received a 12 month terminal prognosis,” explains Oxlade. “So I found it hard to persuade him to take out CI because he reasoned that if he got something really nasty he would get a payout he could use while he was still alive, and if he got a critical illness that allowed him to get back to work quickly he wouldn’t have that much need of cover anyway.
“Non-smoking clients in their 20s and early 30s have far fewer objections because the costs of CI are minimal, and life cover is never in question when someone has dependants. But in the current economic environment you are likely to get these objections from older clients during the sales process about the need, although I have never yet had a cancellation.”
Claims issues
Nevertheless, at least claims pay-out statistics have continued to improve steadily throughout the economic downturn.
The ABI is obviously hoping that its new Statement of Best Practice for Critical Illness Insurance produced this February will help to reduce claims disputes even further. The changes introduced include the standardisation of the pre-existing conditions exclusion for children’s CI, a change in the wording to the terminal illness definition in the light of changing medical science, and clarity improvements to the cancer and Parkinson’s disease definitions. But most attention has surrounded a new set of standard definitions introduced for total permanent disability (TPD).
Although TPD only accounts for 3% of all CI claims, the fact that over half of these are declined has always made the issue a highly emotive subject. New, more descriptive headings and standard definitions for own occupation, suited occupation, any occupation, activities of daily work and activities of daily living have now made this element of cover clearer.
Alan Lakey, senior partner of Highclere Financial Services, a specialist IFA based in Hemel Hemsptead in Hertfordshire, says: “The good news is that they have scuppered the silly name they were previously intending to give the condition but the bad news is they have retained the full name Total and Permanent Disability. I believe that the word ‘total’ is misleading because you can still be covered if you are not totally disabled but are permanently unable to do your own occupation.
“I don’t think that the changes will significantly reduce the 55% of declined TPD claims but they will at least give some harmonisation so that any consumer wanting to do their own research will find it less confusing. Only the own occupation and suited definitions are worthwhile in my opinion. The chances of having a valid claim under the others are very small.”
Valuable new comparison tool
Highclere Financial Services’ Alan Lakey has developed a dedicated CI website which aims to unravel the mysteries behind the complex world of definitions and values, and to compare the cover offered by the different providers. The Critical Illness Insider, which will soon be available at www.criticalillnessinsider.com, has taken over two years to design and comes in two parts, one for consumers and one for advisers. Adviser subscription is £20 a month.
The website has sections highlighting the precise details of each CI condition, with incidences and claims details as well as comments about the differences between the providers. Another section enables advisers to select two providers and compare them head to head.
A further section provides a graphic rating for different age groups, sexes and smoker status. The rating system is based on painstaking research since 2008, where actual incidence figures have been compiled and assessed in terms of the company definitions and a score given based on anticipated claim potential. Additionally, there are sections with provider literature and with statistical information on issues such as conditions, claims and declinatures.
Lakey says: “We will also be aiming to build up a library of historic documents so that advisers can compare ‘old’ policies with today’s version, and there will be separate sections for journalists and for consumers. The idea is to increase confidence in CI amongst both advisers and consumers so that the take-up, which is currently around 16%, is far higher in future years. “Surveys show the majority of advisers sell on price and not quality. Part of the reason is due to their inability to judge the relative values of the competing conditions and also to the difficulty in assessing whether having a condition included will actually result in a successful claim.”