IF LIFE was a game of poker most of us would probably throw our cards in at the outset. Every two mi...
IF LIFE was a game of poker most of us would probably throw our cards in at the outset. Every two minutes someone in the UK suffers from a heart attack. Coupled with a one in three chance that you will also develop cancer, the odds are pretty much stacked against you.
Since 1986, therefore, UK providers have been offering what has now become a core product in the IFA arena - the critical illness policy.
The concept was developed in South Africa during the early 80s as a means of paying expensive medical bills. It was not long before UK providers saw the benefit of offering the product and introduced the policy to primarily cover against cancer, stroke and heart attack.
Dynamic sector
Although ideas have often been poached from places like Australia and Israel, the UK has remained at the forefront of product development. Other countries have looked to the UK, with its dynamic and versatile financial services sector that has been intrinsically linked to stringent regulation, as a guiding light along the path of product design.
Tony Worthington, Swiss Re distribution and development manager, agrees that, across the board, the UK has been at the forefront of product innovation.
"In terms of innovation and regulation we lead the way. Other countries look at what we are doing and then adapt it to their own conditions. People copy our regulatory process as they can look at the mistakes we have made and go straight to our current state of play."
This is generally two distinct groups of critical illness policy - those that get sold direct and cover a smaller number of illnesses (cancer, stroke, heart attack), kidney failure, major organ transplant and coronary bypass, possibly multiple sclerosis and PTD (permanent total disability), and those that have been developed by the larger IFA companies and cover a list of up to 33 illnesses, including Parkinson's, motor neurone disease, HIV for some professions, paralysis, loss of limbs, loss of sight, loss of hearing, and Alzheimer's.
Demographic role
The rise and continued success of critical illness in the 90s is largely attributed to the demographic revolution.
Over the last 150 years life expectancy has doubled. People are living longer. This, together with lower birth rates over the last 30 years, is having a major impact on the age structure of the UK population.
In 20 years time there will be significantly more people aged over 50 than at present. A direct result has been a change in both the public's attitude and approach to life.
"Life insurance is no longer enough. The problems that life insurance was designed to look after can happen a lot earlier due to a critical illness," says Roger Edwards, Scottish Provident product marketing manager.
"If we go back to beginning of the century, life expectancy for both males and females was a lot lower than it is now. Now life expectancy has moved beyond retirement age. It is a significant step as death is no longer the most likely thing that will prevent someone from working."
Edwards says that, as a consequence, critical illness has developed as a survival plan.
"If you are unlucky enough to become ill, advances in medical technology mean that you are more than likely to survive but you need the financial help to get you over that period of physical decline."
Originally, cover was offered on a standalone basis but increasing competition and a desire for greater financial security - stemming both from clients and providers - has led to the product being linked to the sale of mortgages.
Since 1997 borrowers have been actively encouraged to take out a critical illness policy on the basis that, should the worse happen and they are diagnosed with one of the specified diseases, they will be able to clear their existing mortgage debt.
Thirteen years is a long time in product development and nowadays flexibility is key to product success. With a raft of critical illness policies to choose from, clients can now opt to have a lump sum or an income, they can split the sum assured so it pays out a proportion on critical illness and the rest on death, they can buy back life cover and critical illness cover at non-loaded rates after suffering a critical illness and they can convert the policy at retirement so it is geared to pay long term care costs.
So is 2000 going to be the year of critical illness cover?
Sea change
The 90s trend towards more term based business being written and the development of split coverage, tiered benefits and life assurance buyback has so far buoyed the product's success.
Nick Kirwan, product development manager at Pegasus, is upbeat about the current state of play.
"I think we are on the wave of innovation - you only need to look at things like buy back," he says. "The critical illness market is going to explode. We are seeing IFAs under pressure from Government, from the stakeholder and from ISAs and such like. As a result there will be a sea change towards the protection market.
"Already as each week goes by we are breaking sales records and all this will add up to more products and more innovation. Critical illness is where it is at and it is an exciting time."
Development backlash
However Edwards warns that there is a slowly developing backlash towards the extra layers of complexity that have been introduced. As such, he says, it may not be long before the market witnesses a move back towards more simplified product design and a return to the three core diseases.
"Critical illness is a simple concept and there is almost an element of windfall in there - a lottery-type win. Anything we can do to make the product easy to understand and better value for the customer - finding ways of paying them the claims without having to hide behind small print - has to be a good thing."
Worthington agrees, adding that without such a move, there is an inherent danger IFAs will become too bogged down in the peripheral complexities of critical illness and turn against the product.
"Over the past two years there has been a trend to increase the list of diseases covered and that has made the process more complex," he says. "From that point of view there is a desire to simplify the product specifications considerably - even down to the basic three of heart attack, stroke and cancer."
The argument for simplification, as Worthington points out, is that why should someone want protection against Parkinson's disease when the incidence is so rare?
"What it comes down to is education and informing the client of what the risks are. So you can, for example, recommend someone takes out a basic heart, stroke, cancer policy but you can also warn them that there is a 1% risk of them contracting Parkinson's disease. In this way the client can make an informed choice. I think that this will happen more in the future," he says.
Non-specific illnesses
Edwards, however, thinks the critical illness concept may yet go one stage further.
"What is really missing from critical illness lists are illnesses that you would find in an income protection policy. Things like stress and maybe musculo-skeletal problems. You do have a PTD clause on critical illness products that tends to sweep up non-specific illnesses. But things like ME are not permanent."
Looking at the issue long term, Edwards believe such a move could be in the pipeline.
"Critical illness may cover these stress-related diseases. It is a bit like the menu approach where two benefits are combined together and any overlap is removed. You can see that sort of pattern developing," says Edwards.
"I guess the bottom line is that the punter on the street does not know what the difference is between critical illness and income protection, but that is one of the reasons IFAs are here."
According to Swiss Re Life and Health, total new critical illness sales by IFAs increased 18.2% in 1998, from 186,616 in 1997 to 220,730. As Edwards says, for the meantime there is no reason why this success can not continue into the millennium and beyond.
"If we can actually extend the critical illness being sold beyond the mortgage and start billing it as a prerequisite for family and other forms of protection, such as school fees, then there will be even more potential for critical illness sales to develop in 2000."
Robyn Hall is staff writer
