Some long-awaited market innovation may help to boost declining individual CI sales in the immediate future but will it be enough to survive the credit crisis, asks Peter Carvill Click here to download pdf (PDF, 2.5MB)
For an industry where progression is not generally considered its most prolific feature, the individual critical illness (CI) sector of the market has spent the last year steadfastly, repeatedly and routinely bucking this stereotype.
Since most reading this have a vested interest in a successful CI market, 2008 should hopefully be seen in future years as the point at which the product turned and started to improve. After all, in rehab, reaching rock-bottom is the first step on the road to recovery.
That is the optimistic view. The opposite applies in the short term. According to Swiss Re's Health & Term Watch 2008, from 2002's peak of 1,167,928, sales of CI have declined year-on-year to 536,143 in 2007, a fall of 54.1%. While the largest decrease occurred between 2003 and 2004 when sales plummeted by 31%, that is little consolation when the same report records a drop between 2006 and 2007 sales of 8.2%.
So what happened over the last year and what has it brought to the CI table? Well, according to Defaqto's Critical Illness Report 2008: a critical time for critical decisions, "The period has been characterised by the launch of new products and propositions, the rebranding of a number of protection providers, numerous role changes and the withdrawal of two major providers."
The biggest threat to the CI market next year seems to originate in the ongoing credit crisis. The British Chambers of Commerce predicts the current squeeze will turn into some form of recession. "The economic downturn in the market favours the resurgence of protection products," reports Defaqto, "but with so much CI business linked to mortgage sales, which are in sharp decline, there is a threat to the survival of CI as a product."
This mixed message will most likely bear out. In the short term, the crunch may elicit a boost in protection sales as advisers and brokers push to make up lost revenue from the downturn in new mortgages. Long-term speaking, however, the future may not be as bright as restricted finances in household budgets will cause the examination of what is affordable and what is not, and the striking off of the things that the public thinks it can most afford to lose. Unfortunately for advisers and providers, the first thing to go will probably be a protection product such as CI.
Steve Maybury, head of customer proposition at Scor, says the credit crunch will affect the industry in different ways although, generally, he predicts the volume of sales to be down again next year: "I think the overall market will be down which won't be a surprise. It differs from client to client. Some people have been able to sell more CI because mortgage advisers have had more time to sell and fewer customers to sell to so people have been looking to add to their life protection side."
He adds: "In general, it'll probably be down alongside the whole market but a slightly higher proportion of sales will be CI."
It's a mystery
Matt Morris, policy adviser at LifeSearch, when pressed on the ramifications of a credit crunch-caused recession, refused to give a concrete prediction. "The short and simple answer," he postulates, "is that no one knows for sure. The industry has noticed a little drop but we have personally not noted any particular problems - in fact, we've had some record months.
"As far as CI is concerned," he continues," I don't think there have been any dramatic peaks or troughs. I imagine that if the credit crunch does hit the protection sector, we'll see it at the end of this year or beginning of the next."
Given the horror stories that frequently populate the mainstream press about 'evil' insurance companies finding any excuse to refuse a claim, it is little surprise that cynicism about the product is singled out by Defaqto as a major issue: "There is a crisis of confidence in the protection industry and the CI product in particular. Bad publicity over claims and alleged unfair treatment of claimants has tarnished the product. IFAs, too, lack the confidence that claims will be paid.
As a way of dispersing this cynicism about the product, the Association of British Insurers (ABI) set out new definitions of critical illnesses from June. Nick Kirwan, assistant director of protection at the body, said at the time that the guide built on the ABI's work to make the definitions of critical illnesses clearer and the application process more streamlined. Ultimately, Kirwan said, this move by the ABI was aimed towards increasing the number of paid claims through providing simple explanations of what the CI product is about.
But how successful has this been in restoring confidence in this 'tarnished' product? In the short term, judging by that 8.2% drop, the answer would be 'not very'. Yet it is still early days and negative public perceptions, alongside professional trepidation, are slightly more difficult to turn around than a super-tanker going at full pelt.
"I've not seen any convincing statistics one way or the other," says Morris, "LifeSearch thought it was a positive move to clarify conditions and it's important, as an adviser, to set expectations with consumers. Clarifying helps that."
He adds: "A more important move was the work done on non-disclosure - that was very positive. The work on CI - we probably won't see anything dramatic as a result but it's part of an ongoing process on improving the product."
Andy Milburn, head of marketing at Munich Re, suggested the changes made to CI definitions by the ABI were more beneficial to the insurance industry in resolving an internal problem than in improving the public attitude toward the product: "Has it increased the number of customers buying? No. Has it done anything to reduce the mistrust among consumers because they hear stories about CI claims being paid? No. To be honest, if the industry was a company, you would say it was all done internally and not something that was externally facing. It was an internal ailment that we tried to cure rather than something that made us look better outside."
On the subject of the ABI, last year was the first period in which claims statistics for CI were widely released. A lot has been written about that move, much of it in these pages, but has it been effective in boosting faith in the CI product?
"I think initially, it's 'no'," says Maybury, "because everyone is fixated on the one claim in five that isn't paid. What it has demonstrated is that that figure is unsustainable. In the short term it has caused problems. I think it would be helpful as an industry if we concentrate on the positive figures rather than solely the negative ones otherwise we'll never put a good picture out to the market."
Depleting numbers
Defaqto made reference to the fact that providers had pulled out of the market last year. Perhaps the most high-profile was Standard Life in December, coming in the same month that Scottish Widows reduced the channels it used to market its protection products.
While Standard Life's share of the market was miniscule at less than 1%, the exit of such a big name in the industry alongside a scaling-back implemented by another in their CI venture dealt body blows to the shaky confidence of what was seemingly a dying market. However, Morris contends that the re-entry of Fortis into the protection market will plug any current gaps.
The last 12 months or so may have been the point that the product reached rock-bottom before beginning its recovery. But in light of the year-on-year falls, such optimism may be misplaced. Improvement in sales will not only take time to bed in but it is also contingent on the public's goodwill towards the CI product. And recent years have not seen much of that.
