According to a high profile actuary in the US, the reason critical illness (CI) insurance has been s...
According to a high profile actuary in the US, the reason critical illness (CI) insurance has been so successful in the UK due to the inadequacies of the National Health Service.
We are all used to reading media reports of problems in the NHS. Sometimes it is about the length of waiting lists, at other times it is about the fact that it takes so long to diagnose a condition that the patient is untreatable by the time the true extent of the illness is recognised.
As chairman of the second National Critical Illness Insurance Conference held in Atlanta Georgia in May 2000, I was quick to correct the actuary's mistaken viewpoint. Firstly, even though the NHS does have its problems, the service it provides, especially in emergencies, is on the whole very efficient. Secondly, the success of CI insurance in the UK has little to do with the NHS and more to do with its simple concept and the fact that providers and IFAs have embraced it as an essential part of the financial planning process.
Positioning
As the conference progressed, it became clear that CI is likely to be a success in the US by being positioned as a budget PMI product. But this is something that could cause problems in the future as plans are not comprehensive.
CI is a new product in the US, with only a handful of companies already in the market. But many more are developing products for imminent launch. They are keen to repeat the success of CI cover in the UK and rescue the US protection market from its current doldrums.
Life assurance sales have slumped recently, with sales down from 14.2 million policies in 1990 to 11.3 million in 1998. Most of the current sales are replacements of existing policies with cheaper rates.
Other protection plans are showing little sign of market growth. Experience with income protection mirrors that of the UK. It is rarely profitable, is seen as too complex and there are limits on the level of benefits, which reduce its ability to provide true income replacement. The basic concept is understandable, but sales have been sluggish for many years. The UK market is used to policies that use an 'own occupation' definition throughout the duration of a claim, but US policies tend to revert to an 'any occupation' definition after a period defined at the underwriting stage. This can reduce their appeal.
Long term care (LTC) has been quite successful in the US and has achieved fast growth, but it is still a small market. The partnership schemes on which the previous UK Conservative Government based its own proposals have only been developed in four US states and sales have been slow.
However, a more recent development has been individual, employer-sponsored schemes assisted by government tax incentives, and these have really taken off. One affinity group sponsored scheme issued over 47,000 LTC policies in 1996 - more than all the LTC policies written so far in the UK.
The average age at which LTC is purchased in the UK is about 65. Because many LTC schemes in the US provide for the parents of employees (so those employees do not need to take time off work to care for relatives), the average age of the buyer is much younger at 41.
PMI is a no-go area for all but the most specialist of companies due to the effects of medical inflation and the complexity of the products. CI is therefore seen as the US protection market's last hope and as a potentially profitable product line as illness patterns are stable and products can be priced accordingly.
The products currently on the market resemble those that were been sold in the UK in the late 1980s, covering only a few illnesses - cancer, stroke, heart attack, major organ transplant, kidney failure and bypass surgery. Definitions are much stricter than in the UK and sums assured written are frequently capped at $100,000.
Companies tend to develop two or more versions, one aimed at the individual and one simpler version sold at the worksite as employer-facilitated schemes. However, it is still early days and as more companies enter the market they are looking at the history of the UK market to show them the best way forward.
It is gratifying to see just how well regarded the UK protection market is by the world's largest economy. The popular perception in the UK is that the US does everything bigger, better and more efficiently. But while its customer service is flawless, the protection products that are on offer are far less sophisticated than in the UK, where protection is more popular than ever.
CI cover has been a huge success and continues to grow year-on-year. Several companies have recorded successes as a result of innovative product development. But nothing like this has even been suggested in the US. One of the reasons why new products are slow to develop is that all products need to be individually registered in each state in which the provider wishes to write business. This is analogous to an UK company submitting 50 different products to the Inland Revenue for qualifying policy clearance.
Even a simple term assurance rate cut would have to be individually agreed in each state. Worse still, an increase in term assurance rates could be blocked by each state if the company actuary cannot convince them of the need for the hike. Some companies have had to cease trading because they have been unable to increase their rates.
Same cover, different rules
This approval process can lead to subtle differences if the same version of one product is available in several states because individual state legislators have different rules. For example, Georgia does not agree with the concept of critical illness at all and will not approve any plans.
Some states may insist upon subtly different illness definitions. This means that cancer could be defined differently on policies offered by the same company in different states. Little wonder US product developers gaze enviously at the standard definitions introduced in the UK by the Association of British Insurers.
Despite the hurdles to product development, many insurers are still pressing ahead with the development of CI policies. Some companies see it as the natural complement to life assurance, which is the way that it has developed in the UK. Others see it as a cheaper alternative to medical insurance, providing a lump sum the sufferer can use to pay for medical bills.
In the UK, one of the main barriers to the sale of protection products is that clients rarely believe that they will become seriously ill. The belief that the State will provide pervades. But in the US, the public know they cannot rely on public health provision. They know that they will not get medical services unless they have insurance.
Nevertheless, there are over 50 million Americans without any form of medical insurance and the upwardly spiralling cost is one of the main barriers to the sale. CI cover is seen as an alternative, but could be a risky substitution because the customer could get an illness that is not covered and there may not be a high enough payout to cover the costs.
CI cover will no doubt be as successful in the US as it has been in the UK, whichever way it ends up being sold. There are few lessons we can learn from the US about the development of protection products and CI will continue to be mainly sold as mortgage and family protection in the UK. But while the US actuary was clearly wrong in attributing the success of the UK's critical illness plans to the NHS, he does provide another sales angle justifying the purchase of CI cover.
If the policyholder receives a CI payout and treatment for the condition on the NHS is slow, they could use the lump sum payment to fund private treatment if necessary.
Roger Edwards is product marketing manager at Scottish Provident
