While Swiss Re's latest figures for individual critical illness appear gloomy, some analysts are expecting brighter days ahead. Lucy Quinton investigates Click here to download pdf
The latest figures from Swiss Re's 2006 Term and Health Watch Report show the individual critical illness (CI) market as having experienced another abysmal year.
According to the report, new sales figures fell again in 2005, totalling 632,285 new policies – 14.2% down on the previous year. New policies are now 54.1% of the peak figure recorded in 2002, and at the lowest level since 1996.
Ever since 2002, new sales have declined – partly as a result of a slowing mortgage market but also as a consequence of wider concerns over the viability of the product in its present form – premiums have increased and generally negative comment has surrounded claims entitlement and payment.
However, despite the market's demise, Mark Johnson, head of marketing at Swiss Re, says the reinsurer is starting to see, from small-based evidence, that CI direct sales are increasing.
According to another report, this time Defaqto's second annual review of the UK individual CI market, entitled Critical Illness Term Insurance in the UK: "The simplicity of the concept, the many different conditions, together with the lump-sum presentation of benefits has meant advisers have found CI a far easier sale than its older sibling, income protection. Added to this, has been the ease with which CI insurance can piggy-back on a life assurance policy."
However, this has been another year of discontent due to a number of factors such as price cuts, in addition to the ongoing lack of product innovation, declined claims and improving paid claims statistics.
Rod McKie, head of marketing for protection at Aegon Scottish Equitable, says that, over the past year, the CI market has been very competitive. Reinsurance supply has improved as the uncertainties over future-proofing have eased. "This has assisted a price war as providers compete for market share with even those providers who deem themselves to be at the value end of the spectrum significantly cutting their rates," he explains.
Johnson attributes the significant drop in sales figures to declined claims and the effect of the pension term assurance (PTA) debacle last year. "PTA took the industry's attention last year and again when it was withdrawn," he adds.
Apart from the price war, a key factor that needs to be taken into consideration is consumer trust. Declinature due to non-disclosure is unsuitably high. As Kevin Carr, head of protection strategy at LifeSearch, says: "The protection gap is huge and people need protection – they would buy a lot more if they understood and trusted it."
Agreeing with Carr, Johnson says, "Complexity is a major challenge in this area of the market. It links back to declined claims. If CI was made simpler, it would be less of an issue. Speed is also an issue for the industry – with underwriting and administration. However, Johnson says that product providers speed policies through.
According to McKie: "A big trend has been the apparent return to the 'number of illnesses game', which has been prompted by the new CI standard of best practice." He explains that some providers seem to add extra illnesses for apparently no other reason than to make it look as if they cover more illnesses than the competition. What this does show, however, is the high degree of competition in the market as providers look for any edge. However, McKie points out that it is worrying, given that most of these "extra" illnesses will only serve to "further confuse customers without significantly increasing the quality of the cover provided".
Agreeing with McKie, Sue Elliott, partner at Watson Wyatt, says that just adding new conditions is not the answer.
In order to improve this sector of the industry, there are a number of factors that should be taken into consideration, such as education, internal investment and industry harmonisation.
Regarding education, Johnson explains that it is a big issue for this
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sector – both for the distributor and for the consumer. "We need to make sure they understand and, to do this, we need to increase the positive media message, extol the benefits and get product providers to use more case studies. It's important to stress the value and benefit and focus not so much on price and show how valuable it is in times of need," he says.
On the subject of consumers, Steve Casey, product manager at Bupa Individual Protection, says that the industry still does not make it easy to do business with. "More needs to be done in making the whole customer experience as slick as possible. Investment in infrastructure, technology and processes is needed," he explains, adding that, Bupa Individual Protection has just introduced an expert underwriting system within the extranet and, although early days, it seems pleased with the percentage of cases where a decision is being made.
Fundamentally, the industry comes across as its own worst enemy. Johnson says it often seems divided, which fails to send out a positive message to the consumer. "The industry should sing off the same hymn sheet and not criticise alternative products just because they are not as good as another product. The industry should focus on the value of protection as a whole for the entire industry," he adds.
The industry needs to work together to promote its own image. As Elliott says, there is a need "to improve the image of the insurance industry as a whole; there is a lack of confidence or trust by consumers and potentially IFAs as well".
As well as dealing with the unknown quantity of the public's perception of the industry, the market has to contend with the internal "unknown" such as the Retail Distribution Review (RDR) and the Law Commission proposals. Casey explains that it is difficult to predict what will be required and plan appropriately. While these two reviews are still in the early days, the industry requires the time to implement the changes and convey the appropriate messages.
Looking forward to the year ahead, Johnson says: "There is a place for complex CI for people with complex needs, but people also
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often have simple needs too and this is a major opportunity."
There are positive things on the horizon for the industry, such as the speed of underwriting, improved back office and sales will start to stabilise. An increased attention will also be seen regarding declined claims and non-disclosure.
He also predicts that, over the coming year, the market will see more new products, simpler, less complex products and maybe even some hybrid products that will incorporate the best of both individual protection and CI. He says there is no specific provider looking into this, but there is a lot of talk in the market.
Concurring, with Johnson, McKie says the product will continue to evolve, ultimately, resulting in the next generation of morbidity product coming through to take over in the long term. However, "there is still a lot of life left in the current product and this will continue to meet the needs of thousands more customers for some time to come".
But Casey issues a word of caution, explaining that the market should expect to see a continuation of pressure on prices; far greater competition in the reinsurance market with all major UK reinsurers offering CI and on a guaranteed basis; lots of debate regarding the RDR and the Law Commission proposal; and considerable developments of extranets, linking with back-office intermediary systems to try and be as seamless as possible.
However, despite the discontent and frustration in the industry regarding CI, there seems to be genuine affection for this product and, as Carr sums it up, any product that has paid out almost £2bn in five years is a very worthwhile product, but it needs a common sense re-think and an image makeover.
Elliott is inclined to agree with Carr to a certain extent, adding: "CI is a worthwhile product for what it was originally set up for – paying out on genuine critical events. However, she adds that it has moved away from that, which is unfortunate. "My other concern is that CI is often sold when IP would have been more appropriate and this needs to be addressed," she says.
CI has its place in the market but IP is often overlooked, she explains, adding: "IP, to me, serves a much greater need in that it replaces your income when you are unable to work".
However, despite its dismal performance, it will soldier on, much like the British, umbrellas in hand, in any given summer.
