Munich Re's Julie Scott discusses how the critical illness industry could break the cycle of competing on conditions.
Critical illness began as a product with a clear concept when it arrived in the UK from South Africa in the 1980s.
It originally covered just four conditions: cancer, heart attack, stroke and coronary artery by-pass graft (CABG).
Next, end stage renal failure, paralysis/paraplegia and multiple sclerosis (MS) were swiftly added, shortly followed by total permanent disability.
Since then insurers have added multiple conditions and partial payments to try to stand out from their competitors and be all inclusive for the consumer.
This has created an environment of complexity where advisers may understandably struggle to truly understand what they are selling. The ultimate outcome is that consumers are either buying a product they don't understand or they are put off from buying in the first place.
How does the industry reverse years of increasing complexity and create a product that truly meets the needs of consumers?
One simple answer could be for insurers to consider realigning the features of the product with its actual name and focus once more on the truly critical conditions that have a fundamental impact on consumers' lives.
Time for a step change?
Arguably, a step change in the environment is needed. The industry is currently locked into a vicious circle of competing on the number of conditions which require lengthy policy wordings of a medical and consumer "unfriendly" nature.
It leaves the consumer baffled by what they can and cannot claim for. The ABI statement of best practice (SoBP) is designed to help consumers and advisers clearly understand and compare critical illness policies at the point of sale.
However it struggles understandably to keep up with the pace of change and now only covers a fraction of the conditions offered by insurers.
The current momentum of increasingly complex medical wordings and the sheer number of conditions may eventually make the SoBP redundant. With around 70 conditions covered and counting, where will the race stop; at 100 conditions or even more?
What might a ‘truly critical' illness policy look like?
If we want consumers to fully understand what cover they hold and have greater claim certainty, maybe providers could reflect on how this product started and focus on five core conditions such as cancer, heart attack, stroke, MS and CABG.
As many in the industry will know, these conditions account for over 80% of claims and generally are the ones that keep consumers awake at night.
Taking this a step further, full payment of the sum assured could be based on only the most critical types of some of these conditions to retain the true purpose of the product.
An example based on current market wordings, could be cancer being paid out for stage two and above, except prostate cancer which could be paid at stage three.
So what about the claimants that may have a less severe diagnosis of these core conditions or would have claimed under the other 65 or so conditions? Firstly, those who suffer a heart attack but now do not qualify for the full sum assured, may indeed have a range of residual limitations.
However, if they make appropriate lifestyle changes, generally they can be healthy enough to continue a normal lifestyle. If they do go on to suffer a more serious heart attack later within the term of the policy, the full benefit could still be paid.
Secondly, let's consider a policyholder suffering with cancer. If there is not distant (metastatic) spread and following appropriate treatment, they could be cured and healthy for the rest of their lives. If the cancer unfortunately re-occurs as a more serious type, once again the full benefit could still be payable.
It is important that we do not underestimate the impact, both physically and mentally, of having conditions such as a heart attack or cancer of any severity. They still have a significant impact on the life of the consumer and it might take some time for them to recover and return to normal activities or get back to work.
To acknowledge this, a significant life event payment (SLE) could apply. This could be similar to the payment level of current partial payments but pay out using one simple and clear definition, potentially linked to time off work or treatment. This approach could provide an element of severity within the product ensuring that full payment was still available, should a condition become truly critical.
For example, a policyholder with a non-invasive cancer, such as a localised breast cancer could claim an SLE payment. If they were unfortunate to then go on to develop invasive cancer later on within the term of the policy, the full benefit could be paid.
The SLE payment could apply to other conditions that may have been previously covered under the current critical illness product. Although many of these conditions are not considered as clinically critical, they can still have a significant impact on the life of the policyholder and are worthy of some financial support.
Rather than a the full sum assured, for some claimants, a smaller benefit could be enough to provide a financial helping hand. For a policyholder who requires a kidney transplant, if the transplant is successful and there are no post-operative complications, most individuals with a desk based job could be back at work in as little as six weeks.
Also, having one simple and clear definition rather than multiple partial payment definitions might be an easier message to consumers.
Finally, retaining a total permanent disability style benefit (TPD) would allow those with more severe types of illnesses or conditions to still claim the full sum assured.
The current TPD definition is likely to apply to conditions affecting musculoskeletal failure, paralysis and neurological disorders such as Parkinson's or Motor Neurone Disease.
Consideration could be given to including a cognitive element which would capture those at the serious end of dementia. Clearly TPD has had its issues around severity and transparency and a clearer definition might be considered.
From Munich Re's initial analysis, such a truly critical illness product might potentially be provided for around 25% less than the current product.
This would depend on the exact definitions and levels of sums assured included. While past reductions in retail rates have not stimulated sales to date, a significantly cheaper proposition will always be welcomed.
To some, this type of proposal may seem radical but to change years of industry behaviour would require a fundamental change rather than mere tweaks. The industry has tried the latter with little effect.
The same approach has continued for some time and if a measure of success is an increase in new business volumes then it appears to be flawed, as new critical illness sales have been static at best for a number of years.
A change of environment would be more likely to yield results, rather than purely a product change and winning the hearts and minds of advisers would be vital to achieving any fundamental shift in the way critical illness is sold.
Clearly, side by side with the current product in an advised channel, an adviser will feel compelled to sell the version with more conditions. Maybe this type of product would suit other channels such as direct to consumer and the change starts there? It could also potentially be a good fit for a simple product proposition.
There remain a number of fundamental barriers that would need to be addressed for a truly critical illness product to be successful in the UK market and this article does not intend to propose solutions to these now.
Encouragingly, there is a strong undercurrent within the protection industry at present showing increasing support for a change.
Recent positive signs have included insurers removing redundant conditions from their critical illness products because they add absolutely no value to the consumer, for example removing Alzheimer's disease because it is already covered under dementia.
At this point in time it may be more academic or just small steps, but with enough commitment from a few brave insurers, perhaps change will start to happen.
Julie Scott is underwriting client relationship manager at Munich Re UK & Ireland Life