Critical illness insurance has undoubtedly taken off. Sales of individual policies in 1999 exceeded ...
Critical illness insurance has undoubtedly taken off. Sales of individual policies in 1999 exceeded 750,000 up from 250,000 five years ago. Premium rates paid by customers have also fallen consistently over the same period, even though the number of illnesses covered has increased and rate guarantees have been introduced. For insurance companies, claims experience has been favourable. Most importantly, around 10,000 policyholders have benefited from payouts under their policies.
However, all is not rosy in the critical illness garden. Two challenges to which critical illness insurance is vulnerable are currently causing concern in the industry.
The first challenge is the pace of medical development, particularly in the area of how heart attacks are diagnosed. The second is the change in the pattern of diseases and how they are detected. Cancer, especially prostate cancer, is a particular problem area and position papers from the Association of British Insurers (ABI) on both these issues are expected soon. How will this impact premium rates, and will critical illness definitions need to change again?
Table 1 shows the breakdown of critical illness claims paid to date. Cancer is the current major cause of claim, and this will continue. In the future, as policyholders age, heart attack and stroke will become increasingly frequent causes of claim.
When setting premium rates for critical illness insurance, insurers rely on a mix of claims experience data and, statistics produced by the government. Historically, the government's cancer data has been slow to be published meaning that actuaries have had to rely on data from the early 1990s when pricing. In February, however, new data was published by the Office of National Statistics, which confirmed insurers' fears.
For males, cancer incidence has been remarkably steady over the last 25 years. For example, in 1971, insurers would have expected 575 out of every 100,000 male policyholders in their late 50s to suffer a cancer each year. In 1997, the corresponding figure was 580 out of 100,000. This pattern, however, hides some worrying trends.
While the overall total may be steady, there have been big changes in the type of cancer which men are suffering. Again, looking at males in their late 50s, in 1971, 220 out of every 100,000 would suffer lung cancer. The 1997 figure is 115. This is explained by the reduction in smoking. Clearly non-smokers cannot give up smoking again, and so this level of reduction is unlikely to continue in the future. The major worry, however, is prostate cancer. In 1971, 19 out every 100,000 men in their 50s suffered from this cancer. In 1992, the figure was 33, but most alarmingly, the 1997 figure was 57 a 70% increase in five years.
Other medical studies have estimated that around 20% of men in their 50s suffer latent (undetected) prostate cancer in other words, even allowing for recent increases it is still massively under-diagnosed. Many sufferers would be valid critical illness claimants.
At present, medical diagnostic techniques for prostate cancer are not totally accurate. In addition, treatment options are limited. Consequently, there is no UK national screening programme for prostate cancer. Despite this, many doctors are calling for such a programme on a similar scale to the national breast cancer screening programme. As the number of prostate cancer diagnoses continues to rise, the case for a programme becomes stronger.
prostate screening would clearly have a major impact for insurers with more unexpected claims to be paid. As a result, the prostate cancer question is being reviewed by the ABI, and a probable outcome is a change to the ABI model definition. Hopefully, the ABI will take the opportunity to address other relatively minor cancers. A possible solution is that the model definition should be reworded to exclude claims arising from the following:
'Non life-threatening cancers, such as prostatic cancers which are histologically described as TNM classification T1, or are of another equivalent or lesser classification, papillary micro-carcinoma of the thyroid or bladder, chronic lymphocytic leukemia less than RAI stage three.'
This is unlikely to win any awards for plain English. Nevertheless, sometimes insurers need to use technical language. The key point is that the change would not change the fundamental purpose of the policy for the client. They are still protected, at present, in the event of a serious cancer.
Diagnosing heart attack
On the face of it, a heart attack is a heart attack. If a doctor tells patient they have suffered a heart attack, they might reasonably expect their critical illness policy to pay out. The definition of heart attack used by critical illness corresponds to most people's idea of a heart attack. However, European and American cardiologists' have recently published new guidelines on how to define a myocardial infarction (heart attack) in a clinical setting.
The cardiologists revised definition introduces a new type of heart attack. This is called a 'Non-ST-segment elevation myocardial infarction' basically a mild heart attack under which the patient shows symptoms of unstable angina, coupled with increased levels of troponins. Troponins are proteins that normally sit on the myocardium, the muscle that forms the wall of the heart.
When this muscle is injured (as happens during a heart attack) troponins are released, and these can be detected from a blood test. Recent medical developments have led to the discovery and the development of tests for troponins. These have allowed doctors to detect heart damage, however minor, far more accurately and reliably than the current enzyme-based tests to which the ABI model definition already refers. Troponins are therefore fast becoming a standard tool for cardiologists.
The implications of this for insurers are two-fold. First, sufferers of these relatively mild heart attacks, strictly, would not qualify for payments under their critical illness policies. This is because the damage to the heart is too minor to result in 'new electrocardiograph changes' as the ABI model definition requires. This could lead to more declined claims and unhappy policyholders. Second, troponin testing will also ensure that doctors misdiagnose fewer genuine serious heart attacks. With more claims being made it is estimated that around 6% more heart attack claims will be paid.
Addressing the problem
How should insurers and the ABI respond? In theory, modest increases in premium rates should take place. Given the highly competitive nature of the market, it is unlikely that this will actually happen. More importantly, the ABI model definition should change to clarify that a heart attack diagnosed using troponins alone is not covered. This is important to ensure that policyholders' expectations of what the policy actually covers are properly managed.
Do the developments in heart attack diagnosis and cancer screening point to any wider lessons for insurers? The answer is certainly yes, and the lesson is a seemingly obvious one: a 'critical illness' must be genuinely critical.
Alzheimer's disease is a good example of how some insurers may be leaving themselves exposed to future problems.
Two types of illness definitions are common in the market. The first requires that the insured be suffering from Alzheimer's disease and as a result of it is either failing activities of daily living (ADL), or requires continuous supervision. The second is typically 'definite diagnosis by a UK consultant neurologist of an organic degenerative brain disease (including Alzheimer's disease) evidenced by progressive loss of ability to remember, reason, perceive, understand, express and give effect to ideas'.
This second definition is the potentially problematic one. It means that the office would need to pay out for mild Alzheimer's as long as there was both a diagnosis and some symptoms. While this is certainly reasonable today when there is no simple test, no cure and the fact that the disease is ultimately massively disabling, it may not be in future. The future is likely to bring mass-screening and effective treatment. In this future, many extra claims will have to be paid for an illness which is, at the time, not critical.
Critical illness can and should remain a success story for clients, IFAs and insurers but the product must keep up with global developments.
Ross Ainslie is head of product research at GeneralCologne Re
