Defaqto recently published its third annual review of the critical illness market. Author Nick Telfer looks at the past 12 months and how the future could unfold
A year ago, the protection industry was looking forward to a challenging but potentially fruitful future. Pension term assurance (PTA) and the implementation of the Association of British Insurers' (ABI) new critical illness (CI) model wordings were opportunities to regenerate consumer faith in protection.
Unfortunately, the year will be remembered for bad publicity about declined claims and the well-documented PTA U-turn. Adopting the old adage 'never look a gift horse in the mouth' cost the protection industry millions, as it headed up the pension term cul-de-sac. It did, however, prove that the protection industry can move quickly when it believes that there is an easy buck to be made.
In the CI market, the major event was the implementation of the ABI Statement of Best Practice. The deadline laid down by the ABI for providers to adopt the latest set of model wordings was 30 April 2007. Unsurprisingly, with much resource focused on PTA and the ABI's revision of the cancer wording in December, most providers left it until the 11th hour to adopt the new definitions.
Anyone who was waiting with baited breath for radical changes to products was to be largely disappointed, as the majority of insurers merely adopted the model wordings and added some new conditions.
Looking across the industry, there are now 44 different defined events covered by the various policies. Of course, no provider covers all of them. Only cancer, heart attack, kidney failure, major organ transplant, multiple sclerosis and stroke are covered by all insurers.
One positive outcome when looking at the CI market now is the increasing number of insurers that have looked to exceed the ABI model wordings (see box left).
Outside of the 23 ABI-defined conditions, there have been some new additions that have been included, bringing the average number of CI conditions covered by providers to 27.
Although the introduction of new conditions is interesting, the risk of this condition inflation is that consumers are lulled into a false sense of security, believing that the number of conditions covered is directly proportionate to likelihood of a claim. The incidence rates of the many conditions covered by CI policies shows that this is not the case. For example:
n EncephalitisEncephalitis is inflammation of the brain, usually due to a viral infection. It is a rare condition affecting approximately one in 100,000 in the UK each year. Legal & General is the only provider to include cover for encephalitis.
n Primary pulmonary hypertensionThis is a very rare condition. According to the British Heart Foundation, it only occurs in around two people per million per year. Legal & General is the only provider to include cover for this as well.
n Systemic lupus erythematosusThis is a disease where a person's immune system creates antibodies that attack the body instead of protecting it. Between 50,000 and 60,000 people are thought to be affected in the UK, with women being nine times more susceptible than men. Bupa and Legal & General have both added cover for this condition.
As well as adopting the new model wordings and adding conditions, some providers have tweaked their products in other ways.
Aegon Scottish Equitable took the opportunity to undertake a review of its proposition by merging the personal and mortgage versions, and revising some of the terms within that new version. Axa removed the alcohol/drug abuse exclusion from CI, and increased the maximum term and sum assured. LV= removed all standard exclusions from CI cover.
Perhaps the most significant development came from Bupa. As well as adding a family income benefit life and CI option, it now includes the facility to reduce the premium when either cancer or multiple sclerosis are excluded following underwriting. This is a clear indication that Bupa has embraced the Treating Customers Fairly concept. Sadly, no one chose to take up Prudential's challenge to reinvent.
During the past 12 months, the industry has seen a welcome increase in openness about claims experience. This serves two important functions. Firstly, it confirms to consumers that insurers do pay claims.
Secondly, and more importantly, it educates - not just by highlighting what the policy covers but, more importantly, what it does not. This helps to minimise the likelihood of declined claims while at the same time reinforcing awareness of the need for the cover in the first place.
In addition, it also focuses consumers (and advisers) on the reality that a majority of the value of a CI policy comes from the 'big three' covers - cancer, heart attack and stroke.
At present, it is difficult to gauge whether there is any consistency in the methodologies used for compiling such figures. This makes them meaningless as a tool for assessing a provider's relative attitude to claims, although the risk is that this is exactly what they are being used for.
CI insurance has often been cited as a success story. This is true where it has been bundled with life assurance but, as a proposition in its own right, it underperforms even income protection insurance. The fact that insurers and advisers have taken the easy route of piggy-backing CI onto established products - such as term assurance - has been at the root of its problems.
Selling a product as complex as CI through the back-door is unhealthy. Firstly, it means that its fortunes are inextricably tied to those of another - for example, a mortgage.
Secondly, its detail is less likely to be explored during the sales process, resulting in greater potential for non-disclosure and a lack of understanding of what the product is designed to do.
A fork in the road
The UK financial services market is complex, with distributor and consumer needs becoming increasingly diverse, and we need to develop propositions to suit these different needs.
For the non-advice and mortgage markets, simple low-cost products are needed that minimise consumer detriment. Such a stakeholder CI plan would be a bedrock advice policy covering only cancer, heart attack and stroke, which account for the majority of claims. This would remove a large degree of complexity, and would better suit direct and basic advice models. It would still be attractive to IFAs that cannot convince clients to take the more complex and expensive option, or that are looking to provide an 'off the peg' solution for an easily identifiable need, such as mortgage protection.
For financial planners, the protection message must shift from a promise of cash and evolve into a health management and rehabilitation proposition. Even with multi-benefit plans, too many decisions about the structure of a protection portfolio have to be made at the outset, and are then set in stone. The reality is that the most appropriate time to assess what benefits are needed is at the time of the event.
If we are at a fork in the road, it is likely that radical product development will be required either by an evolution of the current product model or possibly a totally revolutionary offering. It is likely that the differing demands of the various distribution channels will mean that providers seriously committed to the protection market will need to consider taking both roads.
Nick Telfer is principal consultant for protection at Defaqto
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