The fact that we are living longer may sound like good news. As might the knowledge that more and more of us are surviving serious, life-threatening diseases. But is this encouraging for the protection industry? Until now, protection products have been formulated around certain fundamentals: statistics such as two thirds of those diagnosed with cancer will not live more than five years and that men are far more likely than women to suffer a heart attack. But recent evidence indicates a shift in the population’s experience of illnesses – all of which could have repercussions for providers.
It was once the case that the diagnosis of a critical illness meant that death was not far away. And, although improvements to lifestyle maybe conducive to longer lifespan, they do not necessarily negate the possibility of a critical illness. “Health changes all the time and critical illness cover (CI) was developed because lifestyles change for the better,” says Roger Edwards, product marketing manager (protection), Scottish Provident. “Now people reach the retirement age and live beyond. Patterns change and some illnesses become less critical and some become more common.”
When CI began 12 years ago, only four conditions were included. And these four conditions, cancer, heart disease, stroke and multiple schlerosis, still account for 93 per cent of claims in the UK. It was a relatively simple benefit paying out a lump sum should the claimant survive approximately 28 days or more. Now the benefit encompasses dozens of conditions and with more people surviving there is a danger of rocketing claims experience. “If people do live for more than 28 days we could be seeing a much higher payout of claims,” acknowledges Paul Cowman, risk product manager at Guardian Financial Services. “And if claims worsen, then the definitions will have to be tightened or rates will be affected.”
But recent research that has dominated headlines of the national newspapers has revealed that the wealthier end of the population, those more likely to purchase CI, are more likely to survive or recover from a CI than ever before.
To a certain extent, this is true, according to the British Heart Foundation (BHF). “Incidence of death has been falling for some time,” says Paul Fawcett, communications. “It is probably due to more awareness of preventative action and improved treatment.”
Traditionally heart disease is a condition associated with men. According to Guardian Financial Services, 20 times more men have claimed for this than women. However, experts feel that this may alter. Men are becoming far more aware of the lifestyle hazards and health risks that may contribute to heart disease, with many adjusting their dietary, drinking and smoking behaviour accordingly. But women appear to have done the opposite, for as the BHF says although there is an increase in health conscious behaviour from men “there are more women smoking and it does not appear that their physical activity is on the increase”.
It may well be that women will face even higher rates, should their susceptibility increase, agrees Cowman. “Naturally, product pricing will go up with risk and so there could be an adverse effect for women.”
Many believe that because people do live longer, their propensity to become critically ill may be higher – meaning that combining CI with mortgage protection and life cover is more relevant than ever. And, according to Margaret Borwick, IFA with Surrey-based Durkadale Professional: “It is actually far more important to take out CI than life assurance because you are seven times more likely to get a CI than you are to die before the retirement age.”
However, some disagree with this perspective. “It is very important that CI is positioned correctly in the market,” warns Ronnie Martin, market manager, life and health, at Royal SunAlliance. “It shouldn’t be at the expense of life cover, it should be in addition to life cover. We often add CI on to a core life benefit and this approach is popular.”
For many, the attraction of CI has been the prospect of a large lump sum. Edwards points out: “People associate this as a more sexy benefit than one paid out on a monthly basis.”
But if claimants are living through their critical illnesses, yet are still not as fit as they were beforehand, a monthly income maybe more practical than the lump sum. When for many the cost of CI is a deterrent, Edwards feels there is a more practical solution. “When people see the cost they can be put off so the alternative is to take a smaller lump sum and combine it with income protection (IP), which also means a lower premium.”
Cowman agrees that a new perspective is essential. “It has got to change because a lump sum is not enough to last a period of time,” he says. “Joining IP and CI together would be a good way of doing this.” Borwick, however, is not so convinced. “A lump sum gives ultimate disposability,” she says. “And you may also benefit from the superior investment performance or tax efficiency.”
Progression overseas is often a source of inspiration for product development, and a recent advance in the Irish CI market has provoked the sector’s attention. “Tiered benefits, where benefit level matches the disability level are being looked at,” says Catherine Baxter, marketing analyst at ERC Frankona. “It may well be that we would see this taking off because it could lead to a cost saving.” By aligning specific critical illnesses with particular payout levels, it has been estimated that a 15 per cent premium reduction on a 25 year standalone policy would be possible for a 40 year old male.
Another option for the CI market is the development of the buy-back option, when CI has been taken out alongside life assurance. Under this policy, already offered by Colonial and Swiss Life, the insured has the option of retaining life cover after claiming against a critical illness. Life cover is reactivated, generally after 12 months, and built up over a number of years. Ted Yeates, head of care fees division at IFA Warwick Butchart, is very enthusiastic about this idea. “I think there is some justification for the market to include buy-back options,” he says.
Reinsurers have also noticed the potential of this option. “I think this is a very welcome development in the UK market,” says Baxter. “It also addresses the concerns of the OFT report of 1996.”
Following last year’s scathing OFT report, the IFA Association and CI Working Party agreed on improvements and extensions to the definitions of core illnesses earlier this year. Included was a new definition of multiple sclerosis, and amendments have been made to descriptions of cancer, heart attack and major organ transplants as well as model wordings for various non-core conditions.
The intention behind these alterations was to build the most comprehensive descriptions of the relevant illnesses to reduce consumer’s confusion. At Scottish Provident, Edwards agrees that the image of CI can only benefit from lucidity. “I want to take away the fears. We need to think of ways of marketing products to appear less stringent to customers,” he says. “We need to make them even more understandable so that customers will have no fear that we won’t pay. If someone has a critical illness, we want to pay the claim.”
Most in the industry agree that the future of CI depends on a close assessment of demographic changes and the public’s perception of the benefit. As Borwick points out: “The people who buy CI are the ones who think they are going to need it.” And, after all, if more of the population is now tending to live past retirement age, in theory this applies to an even greater proportion of people.