Critical illness has continued to enjoy a steady increase in sales over the last year. But reinsurers are beginning to see an end to the honeymoon period with the future of guaranteed rates hanging in the balance and regulation looming, says Paul Robertson
Last year, the main issue in the critical illness (CI) market was the advances in testing for heart attacks, through the Troponin test, and the Government's announcement of prostate cancer screening, which would result in more cases being found early, before they became critical. As a result, the Association of British Insurers (ABI) has released updated definitions of the minimum definitions that insurers may apply.
Nick Kirwan, chairman of the ABI's Critical Illness Working Party believes that for now this issue is settled. He says: 'I don't think there are any big advances in medical science on the horizon, we have addressed these issues for now, although obviously we don't know what is coming.'
Changing needs
However, not everyone agrees. Ronnie Martin, protection director at Legal & General, says: 'I don't think there will be any slowing up in the pace of advances ' after all they are to our benefit. What is important is that critical illness reflects the needs of customers going forward, and that is for serious or life threatening cover. We may see a new generation of critical illness cover coming out over the coming months, reflecting changing needs and advances in medical science.
The main issue for the market at the moment is guaranteed rates. Some reinsurers are beginning to get worried about the uncertainties of risk on their books.
Swiss Re has warned: 'The future of guaranteed critical illness is uncertain as medical advances could significantly accelerate or increase incidence rates. Swiss Re Life and Health has made the decision to withdraw from the provision of long-term guarantees.'
The product is geared at addressing illnesses that are critical, the problem is a lot of increased claims are coming from illnesses which are being diagnosed much earlier than they would have done just a few years ago. If policies are going to continue to cover the same conditions, then premiums will rise as such an increase in claims was not projected in the original premium rates.
Inexperience
Kirwan points out that the actual claims experience is low at the moment. He says: 'When people take out a policy there is a honeymoon period because we know all customers are all healthy at the start. Add to that the fact that there are 4.5 million policies out there and more than half were taken out in the last three years, so claims haven't really started coming through yet.'
Insurers have little choice but to adapt their stance on risk in line with their re-insurer's policy. Already they have been concentrating hard on making definitions of cover clearer ' the biggest challenge is making these definitions clear to policyholders.
Ronnie Martin sees opportunity in this situation. He says: 'It doesn't necessarily follow that the only switch would be from guaranteed to renewable premiums. This gives an opportunity to assess what CI cover should provide, providers have an opportunity to design the product afresh. It is all down to understandability, affordability and meeting customers' needs.'
Some in the industry also wonder if there is capacity in the reinsurance market to maintain the amount of business currently coming through.
To offer a guaranteed rate there are quite stringent reserving requirements and capital has been doubly hit by the terrorist attacks on 11 September 2001 and the poor performance of stock markets.
Kirwan says: 'I don't expect guarantees to disappear in the short term, but I do expect them to become more expensive. What won't change is the customer's need for the product, plus around 70% of sales are made around a mortgage. The mortgage payment is not guaranteed and costs hundreds of pounds a month, so £40 a month, also not guaranteed, is not that big a deal.'
Sales of CI have been doing very well. Sales of new policies increased by 11.8% over the year, to 872,184, in 2001, according to Swiss Re Life & Health's HealthWatch. This was a record year and IFAs sold half of all new policies. They sold 46.1% of all new CI, an increase of 38.9%.
The report highlights the importance of the mortgage market. New sales are linked to the continued growth and activity in the mortgage sector, with new mortgage-related sales increasing by 21.6%. Overall, mortgage-related sales represent 56.3% of all new CI sales.
Ron Wheatcroft, technical manager at Swiss Re Life & Health, says: 'The growth of new sales is encouraging and demonstrates the value that consumers and intermediaries place on protection.'
However, he cautions: 'I think there is too much dependency on the mortgage market, which is the case for protection as a whole. There is a risk of collapse in the mortgage market that could have a major effect on the critical illness market.'
Immediate concerns
One point of concern for the future is the European Insurance Mediation Directive, which will regulate CI from 2004. The implication is that regulation will influence sales of products. If the cost of regulation becomes prohibitive some distributors may withdraw from the market. It is a balance for the regulators to consider, between protection and driving distributors out of the market.
Nick Kirwan says: 'The debate is ' should we have proportionality? The fact that these policies are sold to a low-risk group and it is a low-cost product, gives an argument that straight-forward protection products should have a lighter touch to regulation when it comes in.'
But Wheatcroft advocates caution: 'The regulator would have to be careful not to bias the market. If there were a lighter touch for general insurance, then everybody would avoid life products.'
For the near future what we can be sure about is that critical illness will not disappear and is unlikely to become unaffordable for life threatening illnesses.
'However it seems new policyholders ' or more likely their advisers ' will see a tighter approach to cover, cost and underwriting. There is a selling opportunity in ensuring that clients who may not have considered critical illness before do so now, while they can guarantee costs and before definitions of illness tighten further.'
Paul Robertson is a staff writer
