These are buoyant times for individual critical illness (CI) cover. Sales of new policies rose 21 per cent last year, according to the latest annual survey by ERC Frankona Reassurance. And the number of people with cover in the UK now stands at around three million, roughly one in 10 of the working population.
In total, 820,397 policies were sold, compared to 677,017 in 1998. The average sum assured on new CI policies rose to £52,312, an increase on the average sum assured on existing policies of £47,636.
These figures look even more impressive when the paltry growth levels elsewhere in the protection market, notably in PMI and income protection (IP) are considered.
So just where did everything go right?
CI certainly has one thing on its side – the property market. It continues to be a popular add-on to new mortgage business, according to ERC Frankona marketing analyst Catherine Baxter. “With total mortgage lending in 1999 up by 28 per cent, the close relationship between the two markets is obvious,” she says.
All this spells good news for intermediaries, who are increasing their share of a growing market. ERC Frankona figures show that IFAs sold around one-third of all new policies in 1999.
Not bad, considering the profession only dipped its collective toes into the waters in the mid1990s, after definitions of core conditions for CI were finally standardised.
And things should improve further, as the statement of best practice for CI by the Association of British Insurers helps make this already simple product even clearer to customers.
It is about time intermediaries had some good news. Margins are being squeezed on a range of fronts – from discount brokers and investment supermarkets to Government CAT standards on stakeholder pensions, ISAs and mortgages.
Scottish Provident head of product marketing John Hay agrees the market is growing substantially but says it is too early for the CI industry to pat itself on the back. He says: “Ten per cent of the working population now has cover, but this means that 90 per cent do not. It depends on how you look at it.” He agrees that mortgages have been a prime force behind increased sales. “A lot of people are keen to protect their house in case of illness. Many think their income will take care of itself. But people should be looking at both,” he says.
Scottish Provident’s Self Assurance product allows customers to build a protection package by selecting from CI, life cover, IP, unemployment cover and total permanent disability. Benefits can be increased or reduced as customers’ needs and life stages change. Sold only through IFAs, the policy proved a great success.
A recent development to the plan allows CI to be split from total permanent disability. “It is now possible to get two payments, a CI payout and a further payout if the policyholder later becomes permanently disabled,” says Hay.
He is glad to see the back of one recent trend in the CI market, what he calls the “illness race”. “Providers were splitting illnesses into two or three components to make it seem like they were offering more. For example, they would class CJD as a separate illness, when in truth it was already covered. Other companies had to copy just to keep people happy,” he says.
Dale Tranter, protection researcher at network Countrywide, says CI is now maturing and there have been no revolutionary developments over the past year.
The last new “bright idea” was CI buy back on the Scottish Mutual Pegasus plan, to enable customers who have suffered one CI to buy protection against suffering another. This gives useful protection against recurring illness over a long period.
Tranter also admires the Scottish Provident plan. “A lot of people go for that. It is quite cheap and a good product. Also, Scottish Provident only deals with IFAs, which many people like,” he says.
Another idea, which has been touted for some time, is to offer tiered levels of benefit according to the severity of the illness. Skandia Life life marketing manager Lynda Cox says many in the industry recognise a basic unfairness in CI policies.
“If two people have heart attacks, one could be back at work in three weeks while the other may never be fit enough to work again. Yet they get the same amount of money,” she says.
She gives the example of some policies in South Africa which pay a different amount of money depending on severity of illness. Cancer that can be cleared up with treatment might get 25 per cent, while life-threatening cancer would get 100 per cent.
Using these pay-outs, Cox says premiums would be a great deal lower, which may appeal to some customers. However, she says there are disadvantages. For example, IFAs would be “terrified” of choosing a company with strict claims criteria. They might also face unhappy clients whose illness was not considered particularly serious, when it felt very serious to them. “A tiered system would introduce subjective measurements of illness. It could cause a lot of friction,” she says.
In contrast, the advantage of CI and a commonly cited reason for its success is its simplicity: you get ill, you claim, you get a lump sum.
And Cox sees other opportunities for selling CI. Lengthy NHS waiting lists have earned much bad publicity in recent months – nothing new there. What is new is that more people are willing to pay for operations themselves on a pay-as-you-go basis. Last year around 160,000 people raided their savings to pay for surgical treatment, almost 50,000 more than in 1996.
Now BUPA Hospitals, BMI Healthcare, Nuffield Hospitals Direct and Western Provident Association all run schemes to promote the so-called “self-pay” option. And BUPA saw a 30 per cent increase in the number of self-pay operations last year alone, with patients spending a total of £240m.
Cox says: “Operations can be expensive. Where else would you get a large sum of money to pay privately other than from a CI policy? CI can give people the money to self pay.”
The technology revolution has touched all corners of the financial services industry and individual CI is no exception. Policies are now sold on an execution-only basis over the internet.
Maddison Monetary Management is selling CI online at its website www.maddison.com. It also sells a range of insurance products, including term assurance and income protection.
Maddison rebates two-thirds of the initial commission on each policy it sells. In the example given on its website, it says a CI policy with a 25-year term and a monthly premium of £30 would generate £350 commission.
Some £234.50 of this is returned to the customer, enabling them to either get a greater cash value on their policy or reduce their premiums. Managing director Andy Harris says this typically reduces premiums by 10 to 15 per cent.
He sees the service largely as a loss leader. “There is not a lot of money to be made selling CI or permanent health insurance online, so people tend to avoid it,” he says.
“We just about break even but are keen to push it because it can build up our client bank and people will return to buy more products in the future.”
Maddison’s service is not fully automated – like most online services this will only be possible when electronic signatures can be accepted. Instead, the client e-mails from the site and Maddison sends out the relevant paperwork.
Harris admits there is a risk in buying CI on an execution-only basis. “The whole subject is so complex that advice really should be taken.
“But there is a percentage, who know what they are doing and what they want, who can benefit,” he says.
However, Harris suspects that some customers may have already consulted an intermediary before trying the site. “Occasionally, we get people who have taken advice somewhere else and go to our website to get a discount. But we don’t care,” he says, albeit tentatively.
So while some experts have seen protection policies, and CI in particular, as fertile ground for IFAs reeling from the assault on commission levels on other financial products, the internet is lurking even here. And the challenge it poses must still be faced if IFAs are to protect their businesses.