CRITICAL ILLNESS cover is a booming market. Despite the UK population being "woefully underinsured",...
CRITICAL ILLNESS cover is a booming market. Despite the UK population being "woefully underinsured", IFAs seem to be successful at getting the critical illness message across to the public. New sales of individual critical illness policies rose to record levels in 1998, despite overall sales of total life policies falling.
Research from Swiss Re Life & Health shows new sales of individual critical illness policies during 1998 totalled 694,263, a rise of some 10.8% from 1997. In the six years between 1992 and 1998 total life sales were on a steady decline, but the sale of critical illness policies shot up almost 19% throughout the same period. As a result, providers, and to a large extent IFAs, are beginning to ask whether the sales success of critical illness can be transferred to other products, notably income protection.
A simple concept
Simon Barwell, Swiss Life personal finance marketing manager, says: "The take up of critical illness has been good as it is a simple product and an easy concept to understand. Income protection, however, revolves around occupation and is a product that has been mis-read by the public."
Not only that, as a product, income protection is too 'dressed down' to enjoy the same sales success as critical illness.
This is a point raised by Diana Harding, Canada Life protection business development manager.
"As the concept of critical illness has caught on, income protection has turned into the Cinderella of the piece," she says. "It has become increasingly difficult for the industry to get its message across. But the concept could not be simpler - if you cannot work through illness or accident, the insurer will supplement your income. Critical illness is just more eye-catching and plenty of people know someone who has suffered a stroke or cancer."
The popularity of critical illness stems from the fact that it usually has a collection of zeros added to the settlement figure. It is paid as a lump sum and that in itself makes it more attractive to the person in the street compared with, say, £12,000 per year or £1,000 per month.
Tony Worthington, Swiss Re development and distribution manager, says: "It is a bit like the Readers Digest prizes. Do you go for a one-off payment of £120,000 or do you opt to take £12,000 a year for life? I am convinced people see £120,000 and think that it has a lot more appeal. But if you add up what £12,000 per year could bring, you end up with a meaty total, and much or more than the critical illness policy will pay out."
The main problem, Harding says, is educating the public to understand that if you suffer a critical illness you could be off work for five, or even 10-plus years.
One of the commonly held reasons for income protection not being as quick-off-the-mark as critical illness is the often cumbersome and lengthy underwriting process. Indeed, Harding says that underwriting for income protection means you almost have to be a mind reader.
"Obviously with critical illness you either have an incident or not. But income protection has a lot to do with motivation," she says. "One person with some degree of back pain might not be motivated to go to work, whereas another person who is mad keen about their job will drag themselves in.
"With critical illness you are identifying if the applicant is at risk from a number of conditions, but with income protection you are looking at past work records - even to the extent where you are recording whether a person has taken time off with just a cold.
"The underwriting is much more strict for income protection as employment plays a large part and that can impact on whether or not the case is implemented. More often than not, it is more difficult to get the case underwritten than with other types of contract."
Critical illness policies do have their shortcomings, notably that the major causes of claim for income protection, such as depression and back problems, are not covered. Worthington says that this is one of the key areas where there is a considerable lack of clarity, not only in the eyes of the public, but also in the eyes of IFAs too.
He says that one of the reasons why critical illness got off to a slow start when it was first launched is that IFAs were used to seeing stress covered under income protection and were therefore reluctant to offer a policy that omitted it.
But Harding says that she sees critical illness products designed more to pay for the 'incidentals', such as a family holiday or a prolonged relaxation period to get over the strain of an illness. As a result, Canada Life has added a critical illness rider on its income protection plan, incorporating both elements within the same policy.
"It is a popular plan for us. It is competitively priced and we sell a lot through the IFA market. You need both plans as you need the comfort of knowing that you can maintain your lifestyle. If you can never work again, £120,000 is going to run out," she says.
Worthington adds that another, possibly more effective way of tackling the poor performance of income protection would be to remove the link between occupation and benefit.
This is a move backed by Barwell, who remarks: "The biggest problem has been definitions of occupation. People find it difficult to see why they are 'discriminated' against, but it is not discrimination - a builder is obviously more of a risk than somebody sitting behind a desk."
Universal product
The income protection market could develop in a number of ways. One idea mooted by Worthington is to create a universal product that would cover basic outgoings, rather than trying to replace income. Such a product could then cover utility bills and mortgage repayments, regardless of occupation.
"The link to occupation has been removed immediately, making the sale much easier," he says. "Another possible development could be to link benefits together under a menu approach, selling the policy as part of a package as opposed to a standalone product.
"Again, that would be more acceptable to the buying public. You may well get a 'mini' and 'maxi' version of income protection - one that includes cover for the six core critical conditions, as 95% of claims are likely to be in that six, and one covering specific requirements that you will pay extra for."
Ultimately, he goes on to say, critical illness and income protection could come together under one umbrella, having one policy with one single premium, but which still pays out an income or a combination of an income plus a lump sum on diagnosis or disability.
"It is likely to be a few years yet," adds Worthington. "But I do believe that one considerable impetus for innovative product development will be encouragement from the Government. That may take the form of an education programme and possibly of tax relief."
Public perception
With the success of critical illness apparently based around its public perception, could an industry-wide marketing strategy boost the popularity of income protection?
Harding can see the benefits such a move would bring, but doubts whether product providers would ever pack enough steam behind it.
"For years there has been talk of an industry-wide initiative to improve public knowledge of income protection, but nothing has ever got off the ground. Advertising campaigns are expensive. However worthwhile it would be, most companies would view it as being cost-dependent," she says.
Whether such a marketing campaign would go to the public or the IFA community is open to debate. But Worthington adds: "It is clearly in the insurance industry's interest to promote income protection - and not just from a business point of view.
"The UK population is woefully underinsured. Income protection looks likely to be a core product in the greater context of the Government's programme of health and welfare reform, encouraging people to provide for themselves rather than rely on the State."
Robyn Hall is a staff writer
