With critical illness insurers covering nearly 40 different conditions, Johanna Gornitzki questions whether any of these illnesses should be scrapped
In April, following three years of consultation, the Association of British Insurers (ABI) finally launched its updated Statement of Best Practice for critical illness (CI) cover. As a part of it, three new standard illness definitions have been added - Alzheimer's, HIV infection and traumatic head injury - increasing the ABI list of standard definitions to 23. However, while this list may seem extensive enough, many providers still cover up to 40 illnesses as part of their CI offerings - a far cry from the four conditions covered when CI insurance was invented.
Dread disease
Launched in 1983 in South Africa, CI, then referred to as "dread disease insurance", only covered heart attack, stroke, coronary artery bypass surgery and cancer. It was simple; only very serious conditions for which there was a recognised and urgent need for financial protection were considered.
David Heeney, chief marketing officer for the UK and Ireland at Scottish Re, explains: "The immediate focus was on the most commonly occurring life-threatening conditions for which treatment, while available, was particularly expensive."
However, this did not last for long and soon providers began to add more conditions. "Once the idea began to catch on, renal failure and other conditions which, though less common, were also life-threatening and very expensive to treat were gradually added. As the list grew longer, subsequent additions tended to relate to conditions that were either very rare or that would probably trigger a legitimate claim for total and permanent disability (TPD), so their marginal value became diluted," adds Heeney.
So why were insurers so keen to keep adding to the list?
It is simple, says Richard Verdin, sales and marketing director at Direct Life and Pensions.
Illness race
He says: "They want to demonstrate that they are offering something different that gives them something to talk to the intermediary about".
Likened to the rate war currently driving the market, the illness race - which has slowed down - has, since 1994, taken the average number of conditions covered from 16 to 28. "It certainly was a race with illnesses added pretty quickly. One month it was one provider coming out with a new product and then within the next month another cover was launched with another couple of illnesses added," says Roger Edwards, products director at Bright Grey.
Others were also added due to the amount of media coverage of a particular illness. Creutzfeldt-Jakob disease (CJD) is one example of a condition which received such intense media coverage that insurers felt obliged to include it.
However, this does not prove whether all these conditions were worthy of being added or whether consumers were asking for them. Edwards does not think it had anything to do with adding extra benefits for customers. "It purely gives companies competitive advantages but has nothing to do with consumer demand," he confesses.
This is because the added illnesses-only cover was what TPD was originally designed to pay out for.
"They add a perceived value but in truth the main cost is still from heart attack, stroke and cancer," says Edwards.
Looking at recent claims statistics from RGA, cancer (54%), heart attack (13%), stroke (8%) and multiple sclerosis (MS) (5%) account for 80% of claim causes. Moreover, seven conditions, previously referred to as the ABI's core conditions - heart attack, stroke, cancer, coronary bypass surgery, TPD, major organ transplant, renal failure and MS - account for around 97% of all claims.
However, while this claims experience suggests it may be more or less worthless to add any conditions besides the seven old core ones, flipping the coin, the low incidence rate also means the added conditions only add a small marginal cost to the price of CI. As the main reason for claims are cancer, heart attack, stroke and MS, cutting out any of the other conditions that are covered would therefore only slightly reduce the price - as the insurer would still expect a relatively similar claims experience.
Unfortunate
In addition, despite some illnesses being less common, should someone be unfortunate enough to contract one, then the effect on their life could be of a serious and life changing nature.
For example, progessive supranuclear palsy or bacterial meningitis are both hugely debilitating illnesses that require a high amount of medical supervision. As Verdin points out: "Over the past 10 years Scottish Provident has had two claims for CJD and that is absolutely key for those two people although that is probably not the reason why they bought the cover in the first place. However, try telling those customers that it wasn't worth adding to the cover."
That said, other industry experts believe covering numerous diseases can give customers the false impression that absolutely any illness they may regard as serious will be on the list. The risk is that consumers would falsely believe that the number of illnesses covered is directly proportionate to the likelihood of a claim.
CI providers have been guilty of further strengthening this belief by adding high profile conditions that have negligible incidence rates such as CJD, HIV/Aids, motor neurone disease and progressive supranuclear palsy.
This has left advisers, who are forced to go along with this because of the increasingly litigious environment in which they operate, to make product recommendations based on the balance between cost and the number of conditions, rather than an assessment of the quality and future flexibility of plans.
This is not the right way to advise customers, says Alison Turner-Holmes, protection marketing manager at Skandia, arguing that "it is not about the number of illnesses covered but more importantly about the way in which an illness is covered".
She says: "Many providers are splitting out illnesses to give the perception they are covering more than other providers but that is not the case. For example, CJD can only be diagnosed upon death and an autopsy so how can a CI policy pay out while the client is still alive?"
And indeed, according to Defaqto's latest annual review of CI, "an absolutely definitive diagnosis of any form of CJD requires neuropathological examination of brain tissue".
The report goes on to explain: "This would usually be undertaken at post mortem examination. Most definitions require evidence of deterioration in mental function together with permanent supervision/assistance by a third party.
"A number of conditions merely require a confirmation of an unequivocal diagnosis that may be difficult bearing in mind that, as we have seen, for a definite diagnosis, a biopsy of brain tissue is required."
All in all, many experts feel that if a firm is covering something they should do it properly.
While using a word such as diabetes or HIV is the norm it makes a client think the policy will cover any diabetes or HIV no matter what type it is or how they contracted it.
This is, however, rarely the case with the only kind of diabetes (type 1 diabetes) covered being the one developed in the early years - therefore most people with diabetes would be diagnosed with the disease before considering buying CI - and the HIV definition typically only covers policyholders contracting it through assault, blood transfusion or through certain occupations.
So are some of the conditions superfluous? Nick Kirwan, chairman of the ABI protection party, believes there are three things that should be considered when deciding whether or not an illness should be included in a policy.
Genuine
Firstly, will it account for a reasonable number of claims now and in the future? Secondly, is it an illness that is quite rare but many people would have heard of it, with cover providing extra peace of mind? And thirdly, does it provide genuine cover for the customer?
Unfortunately, some CI experts argue, several illnesses do not fulfil the last criterion - some having been added to simply give providers more "points" in product comparisons with competitors and not adding any value to clients.
Turner-Holmes says: "Unfortunately, due to the computerised comparison systems available to IFAs some providers worked out early that having a greater number of illnesses covered gave them more 'points' when doing product comparisons with competitors. For this reason some illnesses have been added which bring absolutely no added value to the client but only gain the provider more 'points'."
Then again, while this may be true, it would take a brave company to scrap any of the illnesses.
As Edwards admits: "It is difficult to do it in the IFA market because you will always have someone that will cover more illnesses - it is a bit like the price war. You may not agree with it but you have to be a part of it."
The online poll conducted by COVER also reveals another problem - a lack of knowledge among the advisory community as to which illness definitions would truly benefit customers. An astonishing 51% of the respondents of the survey believe CJD cover forms an essential part of a CI policy. That comes despite the fact that it is nigh on impossible to make a successful claim under this definition while still being alive. This result shows that education is key to make intermediaries brave enough to look beyond the number of conditions covered and see what really offers the best solution for their clients.
Providers covering many conditions should be applauded as long as the extra conditions represent better value. However, along with offering a comprehensive product comes the responsibility to educate intermediaries to make sure they know what is and isn't covered. And that responsibility should not be taken light heartedly.
