While some health cover products have been slow of the mark, critical illness cover can claim to be something of a Linford Christie – a good track record and a favourable public image.
CI is still relatively new. City of Westminster Assurance was the first to launch a policy way back in 1980. Back then CI found the running a bit harder.
After the 1980 start, there was hardly a deluge of new players over the next few years. In 1987 there were only 20 products on the market but by the beginning of the 1990s. the number of products and players was beginning to escalate significantly and CI found itself comfortably ahead of the rest of the health cover field.
Critical illness cover has been the success story of the 1990s, as Roger Edwards, product marketing manager at Scottish Provident explains: “CI is undoubtedly the protection product success story of the 1990s and continues to grow while other financial services markets remain sluggish.” On a more global scale, Edwards, who last year went on a fact-finding tour to the US, indicates that the success of CI in the UK is very much down to the public perception of CI as a straightforward product with clear cash incentives. Over in the US the climate is somewhat different and consequently sales are unimpressive. “The American public, who by necessity need to purchase fully comprehensive medical insurance, is yet to be convinced that it has a place in the financial planning portfolio.” Edwards goes on to explain where the UK got it right and the US got it wrong: “In the late 1970s US insurers launched a CI-type product – what were then called cancer plans. The definitions were very loose and many people had claims turned down. Bearing in mind that the US is a very litigious nation, the move by the insurers backfired. This ploy of hiding behind small print did not really happen in the UK where there has always been a `we will pay the claim’ mentality. The vast majority of claims in the UK that have been refused have been on the grounds of non-disclosure.”
There are now over 100 products on the market in the UK, and at least 65% of these have been launched since 1990.
Critical illness payouts can come in the form of income payments if preferred, or as reduced lump sum plus income. The income option often brings with it some confusion in that permanent health cover – or income protection as it is often now called–and CI are seen as direct competitors. They are not, because they provide cover for completely different things. If you suffer from severe back pain or a stress related illness you will not be covered under CI but you will qualify for income protection.
On the other hand, if you have a minor stroke or heart attack, you would probably qualify for a CI lump sum payment. But if you failed to satisfy physical tests laid down under a standard income protection policy, there would be no payment made.
The fact remains that it is not quite true to say that CI cover is clearly distinguishable from other forms of health cover. If you stick to the six core definitions – such as heart attack,, stroke or cancer–then clearly it is straightforward, but in recent years, providers have added extras in an effort to attract more business. This has been seen, by the providers at least, as adding value to the basic cover.
The detractors say these are unnecessary extras, particularly as 95% of claims relate to the core definitions anyway. Customers are just left scratching their heads.
One of the most positive changes to CI over the last 12 months is the clarification of the core definitions set out by the IFAA in relation to cancer. But problems really come to a head when it comes to definitions of permanent total disability (PTD) relating to conditions outside the core illnesses.
Nick Kirwan, product development manager at Pegasus, is a member of the Critical Illness Working Party, and is currently assisting the IFAA in setting out new standardised definitions of PTD.
He explains how he would like to see things develop: “There has been progress on PTD definitions but it has not been as rapid as I would like. There needs to be a clearer method of assessing this. We must gradually move away from occupationally based PTD, but I don’t think it will ever completely disappear. For instance, in the case of business assurance, you would need cover based on an individual being unable to carry out a specific role.”
Kirwan continues: “I do not think there is any value left in the `any occupation’ definition, where payment is only made if you are unable to carry out any occupation, not just your own. The Ombudsman has already made it clear that the judgement should be made on a ‘reasonable occupation’, and there have been legal judgements which have put huge question marks over the `any occupation’ definition. There are still a number of providers using, `any occupation’ definitions but I cannot realistically see this situation lasting.”
The main concern over PTD is clearly a lack of uniformity, but introducing this is no easy task. The problem has been that much of the testing has been based around the DSS Activities of Daily Living test. The ADL test was really designed with long-term care in mind and does not really deal with younger people and the sort of disabilities they might have.
Kirwan believes some lessons can be learnt from the recent launch by UNUM of its Essential Ability Cover. This income protection product is based around 11 physical tests and one psychiatric test. So long as you satisfy three different tests you will qualify for payment. Cover is not dependent on occupation – which is the real selling point of the product.
“I think the way forward is for functional tests. As far as developing new standard definitions is concerned, actually producing something concrete is high on the agenda. I would hope to see the unveiling of the new definitions in the first quarter of next year,” he says.
There are also concerns over the inequalities of PTD under some group schemes, as Robert Stephens, marketing communications manager at Guardian Financial Services explained: “The individual may well be paying for PTD, because it is included in the group package, but will not qualify for the cover.” What providers are now doing to overcome this problem is allowing the individual to strip PTD out of the policy. By doing so, premiums are much fairer across the board.
With a few minor exceptions, premiums have remained static over the last 12 months. As Kirwan explains, there is enormous scope for claims to come down significantly. “Because CI is a relatively new product, there isn’t the same level of claims experience as a long established product like term assurance. I think the pace of change to premiums will relate to this – in time I think premiums will fall substantially.”
One of the reasons in the past that CI premiums have been high is because there has been little claims management experience. “With HIV there was an element of over caution. We thought the claims were going to be a lot higher than they were. On the other hand, we have had many more claims for cancer than we would have expected,” Kirwan says.
In short, all bodes well for the CI market as Ronnie Martin, marketing manager, life and health at Royal & SunAlliance comments: “Developing CI for business protection has proved an undoubted success. Offering partner/shareholder protection, and in effect widening key person cover.”
But this is by no means the only area in which CI can expand. Kirwan points out other opportunities: “It is not so much a growing market as an exploding market. In terms of mortgage endowments, every policy now has a CI rider. There are huge sales linked to mortgages generally, and this has only been helped by the recovery in the housing market. And we have seen an enormous increase in sales of critical illness for its own sake. Altogether we had sold by June what we would have expected to sell over the whole year. We expect to double business this year.”
Two other factors could influence a boom in CI sales – increased IFA awareness of CI and its benefits, and a lowering of premiums. As far as IFA awareness goes, there has been enormous progress already, leading most providers to abandon their CI roadshows on the grounds that IFAs now feel both familiar and comfortable with the product.
With regard to premiums, the aim is to capture the lower end of the market and bury the image of CI as a product predominantly for the higher social classes.