Road to nowhere

The risks of critical illness increase with time and age and as critical illness as a form of insurance gets older, so too do those with cover.

Some reinsurers are getting increasingly wary about the uncertainties of risk on their books. Swiss Re, in its report Healthwatch 5, 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 recently made the decision to withdraw from the provision of long-term guarantees'.

It is probably too early, and largely inappropriate, for the grass roots advisers and their clients to get nervous, but it is appropriate to consider what may happen to cover and cost.

Critical illness has enjoyed a steady increase in take-up in its relatively short life. The marriage of a simple concept product to a simple desire from individuals to be protected financially against a life-threatening illness has been a successful one. But insurers and especially reassurers are beginning to see an end to the honeymoon period as the realities of life impact with time.

'I think we are going to see an explosion of claims but in some way that is what we expect,' says Nick Kirwan, head of protection product development and marketing for Scottish Provident. 'Firstly, when we sell a critical illness policy the person is underwritten and so we know at the start they are healthy, so there is a sort of claims honeymoon for the first years of a contract. If you look at claims potential, there are four million policies in force with policies selling at a rate of one million per annum, so a quarter are in the honeymoon period. This effect of the honeymoon period is wearing off as those holding policies get older.'

As with most marriages, some form of compromise helps things along. In this case, it is the combined effects of a clearer definition of exactly what policies will cover, along with medical developments which improve, and at an earlier stage, diagnosis of critical illness.

'Even if sales stop today, which is unlikely, claims will increase significantly over 10 years. So, will premiums increase? I think they will,' says Kirwan, 'But what is more likely to increase is the cost of guarantee of premiums rather than the underlying rate. There is no big thing we cannot see in claims incidence but medical science has a double edged effect in that it allows us to diagnose earlier.'

Time will tell how medical diagnosis developments and claims experience will work together and what sort of a balance they create. And this is the nub of the problem for insurers and reinsurers.

Predicting the future

'The product is geared at addressing illnesses that are critical,' explains Alan Tyler, health and welfare strategy manager at Swiss Re. 'The problem is a lot of increased claims are coming from illnesses which are being diagnosed much earlier then they would have done. If policies are going to cover those then premiums will rise because those claims were not projected in the original premium rates.'

While the situation may not be so bad as to make reinsurers turn away from the critical illness market, what it could do is make them pull away from the risk of guaranteeing premiums for policyholders.

'The future of guarantees depends on the industry's ability to predict the future and the effect medical advances will have on the product,' says Tyler. 'Some companies may be more reluctant to offer guarantees than they have in the past, or may want to change what they charge for that guarantee. It is much more difficult when you are not relying on morbidity or mortality but diagnosis of something.'

This is not to say, of course, that a willingness to guarantee rates may not return when underlying claims experience becomes clearer. But for now we are seeing reinsurers pull out and can expect insurers to follow suit.

'Some of the major reinsurers have recently taken a step back from this market and are starting to factor in significant increases to guarantees and that will eventually feed through to the direct market and to the rates insurers have to offer,' says David Grimshaw, actuary at Swiss Life.

'Munich Re, for example, has adopted a conservative stance for some time,' adds Grimshaw. 'We are insured by General Cologne Re, which is not changing anything yet but looking at the situation. If I was a reinsurer, I am not sure I would want to chase the business coming from those rejecting it.'

'We could see some people ceasing to offer guaranteed rates or the differential between the guaranteed or renewable rates increasing. Renewable rates are perhaps under less pressure because you can adjust the rates when experience comes through, rather than having to do it by anticipation. To some extent you set your rates now on a best guess basis as to what is going to happen and adjust that in the light of experience, whereas with guaranteed rates, inevitably, you have to adopt a degree of conservatism,' Grimshaw adds.

While these are the considerations actuaries and underwriters have to make, the key issue for individuals taking out critical illness cover and for advisers is cost and getting the best cover for the client.

The right price

Of course, those policyholders already under guaranteed premium options will keep this protection as existing policies cannot be changed. However, those coming to critical illness for the first time may begin to find their options limited.

'Existing policies cannot be altered,' says Grimshaw, 'As for new ones ' companies may move on premiums this year, perhaps in the autumn ' it takes time to amend systems and print literature, so whatever happens I do not think it will happen overnight. I think they will be around for a little while yet. You may find fewer companies offering them, but they will not suddenly disappear.'

It is also unlikely any withdrawal will impact too heavily on the number of individuals taking cover.

'Customers like guarantees ' that certainly is an attraction,' admits Kirwan, 'The jury is out as to whether people don't take out policies without a guarantee. The other side, of course, is that premiums would be cheaper.

'The reality is that if you are paying an average of £40 per month, instead of paying £35 per month, but in the future it may be £45 per month, will people not accept that? The market has been extremely buoyant for the last year or so ' the volume of sales is up but premiums have come down. We do not envisage them going up too much ' if people were happy two years ago paying higher rates why not now? Premiums are 30% cheaper than three years ago as premiums have fallen by 10% a year.'

Insurers have little choice but to adapt their stance on risk in line with their reinsurer's policy. Already they have been concentrating hard on making definitions of cover clearer ' the biggest challenge is making these definitions clear to policyholders. Nobody wants to see a claim made ' insurer or client ' but more than that, nobody wants to see a claim denied.

An important role to play

This is where the IFA has a key role in making sure the client understands exactly how their policy works and what they are covered for and when.

'We need to minimise the incidents of non-disclosure and revisit statements of critical practice ' is it as clear as it should be? Also we need to get the message over to IFAs how important it is to get all the medical information over,' says Kirwan. 'No-one had a claim denied because they gave too much information.

'Hopefully standard definitions will help ' we are still in the honeymoon period here as standard definitions have only been in place for three years. People will start to know what's covered and what's not.'

While meeting client expectations is one thing, we may still see further tinkering with the critical illness product in terms of cover to ensure it remains affordable.

'The problem with medical advances is there is an open end to it,' says Ronnie Martin, protection director at Legal & General. 'It may mean a move down the reviewable route or it may mean a move towards products which are structured differently to give customers the guarantee of pricing which we know they like. Perhaps the product structure may be different ' it may not provide such wide ranging cover. We could see a move back to core real life-threatening illnesses rather than minor cover or a cap on the period of guarantee.'

What we can be sure about is that critical illness will not disappear and is unlikely to become unaffordable for life threatening illnesses but new policyholders, or more likely their advisers, will see a tighter approach to cover, cost and underwriting.

'There is nothing wrong with critical illness business,' reassures Kirwan, 'it will continue to flourish. The thing about critical illness is it is a risk we know about. The more claims we have, the more we can underwrite and cost well. More than anything it is the simple product people want. Almost all policies that are taken out are individual, not group ' they have selected it themselves which is a huge vote of confidence.'

There is a selling opportunity in the short term, at least in ensuring clients who have put critical illness on the back burner, or not considered it before, to do so now, while they can guarantee the cost ' if not the outcome.

Stephanie Spicer is a freelance writer