With falling sales, concerns about viability, confusion over new ABI requirements and a poor public image, Barbara Cockburn asks whether critical illness insurance is a terminal case Click here to download pdf
Critical illness (CI) cover has been hitting a brick wall over the past couple of years, with advisers saying the definitions are getting more complex which in turn makes it difficult to write CI business.
The Swiss Re Term & Health Watch Report 2006 found that CI sales fell 14% between 2004 and 2005, from 736,671 to 632,285. This is 54.1% lower than the peak figure registered in 2002.
The report's author and Swiss Re's technical manager Ron Wheatcroft believes that new business volumes have been affected because of concerns around the viability of the product in its current form.
In a chapter of the report entitled CI – damaged beyond repair, Wheatcroft notes that while CI is often tied onto mortgages and there has been a slowdown in the mortgage market, this is not the main factor behind the recent slump.
"New sales have declined partly as a result of a slowing mortgage market, but also as a consequence of wider concerns around the viability of the product in its present form, premium increases, and generally negative comment around claims entitlement and payment," he states.
But Rod McKie, head of marketing for Scottish Equitable Protect, says the exact details of the fall varies depending on whether you look at the number of proposals or at annual premiums.
"The accelerated CI market is down approximately 20%," McKie says. "This has stabilised somewhat over the first quarter of 2006 albeit there is no significant impetus for market growth to return. The standalone CI market has been more resilient when you look at annual premiums, with small growth over 2005. However, given the scale of this market, this is not overly significant."
There has been continued uncertainty over the pricing of the product, Wheatcroft says in the Swiss Re report, and while guaranteed premiums are still available, it is costly.
Complexity
Last month it was revealed that many IFAs were unaware of the Association of British Insurers' (ABI) updated CI statement, the deadline for adoption of which is April 2007.
Product comparison portal the Exchange recently produced a report on behalf of insurer Royal Liver which found that 87.5% of responding intermediaries did not understand the proposed amendments, including the addition of future-proofing which ensures the product is defined in such a way that it takes into consideration medical developments in the future.
This is an indication that the product has perhaps become more complex than it needs to be.
Insurers in the market are consistent in their view that the link with the sale of a mortgage appears to be an obstacle for CI sales.
Johnny Timpson, protection and distribution development and technical support at Scottish Widows, says the protection market is "mortgage-buoyed", and suggests that since the industry became regulated by the Financial Services Authority, many advisers have left the market due to the amount of work involved in becoming regulated.
"There's a clear gulf in types of advisers and the activities they are involved in. It's now very evident that the bulk of advisers work on investment and pension commissions, while there are general insurance advisers who are qualified to sell mortgages and mortgage protection."
He adds that a "significant" number of advisers have exited the market because of the laborious regulated sales process. Advisers now have to conduct a more in-depth fact find and flow audit of a client's needs. For the customer, he says, this is no bad thing, but it has meant that the productivity of advisers has fallen.
Bright Grey's distribution director Andy Peters says that CI is seen as complex to sell. "It entails long application forms and can also involve a lengthy underwriting process. This is often seen as off-putting, particularly when you look at how easy it to apply for accident, sickness and unemployment cover or mortgage payment protection insurance.
"While CI is generally regarded as superior and shouldn't really be compared to these two products, there is scope for our industry to improve on its processes and perhaps develop cover that both meets CI needs and is simpler to apply for," Peters says.
Kevin Carr, head of protection strategy at LifeSearch, says the industry does not make it easy for intermediaries to write protection business.
McKie thinks the UK housing market could be acting as a barrier to market growth at present, but he is confident that sales will pick up.
"The customer need for CI is still there, but price is an obstacle. Although there have been recent price reductions due to competitive forces within the market, the cost of cover is still relatively expensive for lower earners," he says.
"A more pragmatic approach to the setting of the sum assured for CI could help alleviate this affordability issue. A lower amount of cover than for life could be an option, or reviewable premiums may also allow CI cover to be more affordable."
Customer understanding of CI and its benefits is still not consistently good, McKie suggests, and providers and advisers could play a role in improving the way CI is promoted and communicated to potential customers.
Many industry experts blame the consumer press. McKie says: "There is no getting away from it. CI in particular has taken a bit of a bashing from the press over the last 12 months. This has not helped to improve the levels of trust among customers that valid claims will be paid."
Agreeing with McKie, Peters adds: "Many consumers seem to view it as an expensive luxury rather than a must-have product. Perhaps this is why there is so much focus on price in the industry, which is seen as the main hurdle advisers have to overcome.
"However, they can help their clients see why they need protection. They can also help their clients realise they don't have to take an all-or-nothing approach, as menu plans are built to be flexible enough to suit any budget. Advisers can make sure their clients don't miss out on these benefits, and demonstrate the advantage of seeking advice."
Carr agrees that the price of CI cover, in particular guaranteed rates, has increased "significantly in recent years", and says that this has undoubtedly impacted upon sales.
He argues that intermediaries need to recognise that protection is not a commodity product sold on price alone. "They need to embrace the modern world of protection, namely e-commerce, harsh underwriting and web competition, and use individual complexities to their advantage, such as the greater use of trusts.
"They should continue to stress the importance of protection – protecting what you already have has always been far more important than spending on something else," Carr adds.
Phil Hull, IFA at Sesame, says advisers have huge potential to sell protection, noting the £2.3trn protection gap among the UK population. He says the market is full of CI products, but believes that more needs to be done to come up with clever concepts.
One idea he offers is a merging of private medical insurance (PMI) with income protection (IP) as well as CI, because each has benefits. If you are ill and you need to go to hospital, PMI helps, IP assists in the rehabilitation back to health and to the workplace if a long-term illness kicks in, and CI will pay out on diagnosis of a critical illness.
He says: "It's a good portfolio of cover, and you need to make sure you have the right levels of cover for whichever stage of life you are at. I want to see these three types of products delivered together, because they can cope with whatever happens."
Hull says Prudential has brought out a radical policy in its serious illness cover, but concedes that its success can be measured only with time. He observes that Virgin Money is also trying to do "something different" with its cancer-only plan, but he is not so optimistic about its future.
Michael Ward, managing director at Direct Life & Pension Services, however, defends the Virgin Money product: "On the basis that around 52% of CI claims paid are paid for cancer, I think the cancer plan from Virgin could mark a change in the whole approach to CI marketing."
The year ahead
So what does the next year hold for CI sales? Timpson believes the glass is half full. He predicts that sales will increase over the next year, or that at worst they will stay the same.
Peters, on the other hand, expects the market to remain flat. "We don't expect a great deal to change, and whether or not the planned changes to CI definitions next year will have a big impact is anyone's guess right now."
No matter what else happens over the next 12 months, it seems certain that the individual CI sector will be undergoing a lot of changes. For the market's sake, lets hope they will be for the better.
Barbara Cockburn is a freelance journalist
