Despite a turbulant year for critical illness rates, sales remain strong. However, the market awaits the launch of new products with baited breath, writes Kirstie Redford Click here to download pdf
As any adviser working in the market will know, over the past 12 months we have seen one of the most eventful periods in the critical illness (CI) market to date. Diagnostic developments and a predicted claims explosion have led underwriters to reassess risk and make some complex decisions about current offerings.
Events have snowballed since Swiss Re decided to turn its back on guaranteed rates last year, leading many providers to ditch popular guarantees altogether or hike prices to cover the added risk.
More reviewable rates have been launched, but prices for guaranteed plans have fluctuated dramatically and continue to do so. Providers are still trying to find a comfortable level for guarantees while staying competitive – meaning some providers continue to react as competitors reprice, moving their rates up and down accordingly.
Against the odds
Despite these price movements, sales have not slowed down. According to GE Frankona Re, over one million new individual CI policies were written in 2002 – an increase of 28% on the year before. In fact Roger Edwards, product director at Bright Grey, says it is the best year CI has ever had.
"Even though prices have gone up, the price difference between reviewable and guaranteed rates has not been wide enough to damage guaranteed sales," he says.
The problem now facing insurers is to try and prevent the price differential between guaranteed and reviewable rates from widening any more, without making benefits less attractive to new customers.
One much talked about solution to keep policies affordable is to change the current definitions of illnesses covered on CI plans.
However, Edwards believes any new product innovations will not appear in the next 12 months as there is still much to debate.
"Reinsurers have certainly been running brainstorming sessions to find the best way to keep prices affordable. We will start to see new ideas coming along – such as UnumProvident's tiered benefit plan, which launched last year.
"There has been much discussion in the industry. However, I have not picked up on anyone planning to launch a 'next generation' product next year. But many providers will be looking at the implications of a new offering."
Indeed, there has been huge debate over the past year about the so-called next generation of CI products. The pros and cons of tiered and reviewable definitions have been discussed, with no real conclusions. Although it makes sense to reduce cover in order to keep premiums affordable, there is concern that this could damage the appeal of current CI products. And no one can deny they have seen fantastic sales to date.
"My biggest fear is that the right solution for the industry is probably not the most customer-friendly solution," says Edwards.
Ronnie Martin, protection director at Legal & General, agrees that providers must be cautious with new launches so they do not alienate customers.
"We need to take time to reflect and not allow ourselves to over-react like we did with the AIDS issue. We do not want to undermine cover. Advisers need to recommend products using sensible decisions. If we have a guaranteed rate but cover fewer conditions, it could mean an incredible dilemma for advisers when recommending plans."
Reinsurer GE Frankona Re has no plans to ditch guaranteed rates, but is considering reducing cover for less serious conditions.
"We feel there is a genuine need for IFAs to have a guaranteed product," says Alan Martin, business development at GE Frankona Re.
"What we are asking is, can we price it so we feel comfortable with the risk? We have come up with different solutions and we have found that we do not feel comfortable pricing angioplasty for guaranteed rates. And we think the need to keep a guaranteed rate is much greater than the need to cover one specific disease."
A step back in time
He believes the market has to re-evaluate the conditions it currently covers if prices are to remain affordable in the long term.
"Angioplasty is an example of the market taking cover a step too far. The procedure is nothing like something such as bypass surgery," he says.
Taking cover levels back to basics so they cover the life threatening conditions CI polices were originally designed for is another option that has been debated over the past 12 months.
However, GE Frankona's Martin says the market would be taking a backward step if cover were reduced too much: "The early policies did not include conditions such as benign brain tumours, so a complete move back to basics wouldn't help. We need to finely tune cover."
Some industry pundits have predicted that if future CI policies ditch some of the less serious conditions, the need for income protection (IP) policies could become more apparent.
IP has not enjoyed the same sales success as CI cover, one of the reasons being that it does not have the same 'windfall' benefit, which seems to appeal more to customers. However, if some gaps in cover do begin to appear in future CI plans, it could give IP a new boost.
Son of CI
With this in mind, could a hybrid product, including elements of both CI and IP have a place in the future? GE Frankona's Martin does not rule this out.
"If you are looking at covering an event such as a mortgage, cross-savings could be produced by a hybrid critical illness/income protection product. If the policy only pays out once, whether it is as an income or as a lump sum, it would be cheaper to bundle the products together than sell them as separate policies," he says.
With mortgage-related sales being such a strong market, the development of a hybrid product should not be ruled out.
Indeed, the mortgage market is certainly one to watch as it has historically had a knock-on effect on CI sales. The current housing boom is largely down to record lows for interest rates, however L&G's Martin says even if interest rates take an upturn it should be positive for CI sales.
"Critical illness cover is very much driven by the housing market. Mortgage sales are still the cornerstone in the success of critical illness cover. While what future products look like is important, what happens in the housing market is important too.
"Because interest rates are so low at the moment there is not so much concern among borrowers about affordability. However, if rates increase it will raise the issue of affordability, meaning sales of critical illness cover could see a boost," he says.
CI policies, as they stand, provide attractive benefits to customers. With so many good-quality policies around, the choice between plans tends to rely heavily on price.
Despite price being such an important driver, Edwards says few advisers understand the reasons behind the price changes we have seen this year, meaning few are unlikely to understand the reasons why insurers may be forced to reprice in the future.
"I am not 100% convinced the majority of advisers are aware of the deeper issues affecting the critical illness market. Although they are certainly aware that guaranteed rates have gone up," he says.
As guaranteed rates continue to be a firm favourite among advisers, which way will we see rates heading over the next 12 months? According to GE Frankona, we should begin to see more stability by the end of next year.
"Looking forward, we feel that with the price of guarantees there will be more hardening over the next year or so, but then rates will settle down and find stability for the middle term," says Martin.
