Moves towards a severity-based contract may over-complicate critical illness products, says Paul Hately
Critical illness (CI) products meet a customer need for financial support in the event of a life or lifestyle-threatening event and generate income for insurers and advisers.
Developments in the range of conditions covered and in medical advances mean that increasingly, it is becoming possible for customers to suffer minor health setbacks that are anything but critical, but which meet their policy's claim definition. Arguably it is this simplicity ' the majority of covered events triggering payment of the full sum insured ' that has led to the phenomenal success of CI sales. Therefore, any moves towards a severity-based contract, more closely linked to need, might over-complicate the product and the associated advice leading to fewer people protecting themselves with CI cover.
Two medical developments have the potential to increase the lottery nature of even the core definitions of cancer and heart disease and could lead to premium increases for new business and, at least in theory, for existing reviewable business:
Prostate cancer is a condition that many more men have than know it. Swiss Re estimates that in the UK only 1% of existing prostate cancers are discovered. The Government is, however, increasing awareness of prostate cancer and is likely to encourage screening in the over 50s. Not withstanding the nasty procedures that must be administered, the likelihood of men being diagnosed as having an invasive carcinoma of the prostate, but which meets a current CI cancer definition ' is not life or lifestyle threatening ' is increasing.
The second development is in a test for heart attack based on the presence of enzymes, called troponins which are emitted when even the tiniest part of the heart dies. Cardiologists suggest that troponin tests will become the gold standard for determining whether a patient has suffered a heart attack. This could result in an increase in lottery heart attacks ' incidences that hitherto have been classified as angina now classified as myocardial infarction, with a corresponding increase in cases of policyholders claiming and returning to work soon afterwards, not having suffered any real loss. Like minor cancers, these mild heart attacks are, of course, distressing for patients.
These medical developments may lead to an increase in claims incidence not included in the pricing of existing contracts. A reasonable view of the future of CI suggests that ' barring any other changes ' prices should rise significantly, particularly for guaranteed business. The alternative is to change the definitions for new policies to keep pace with medical advances so that payments are made on diagnosis of a critical illness and not on a lottery basis.
Through the Association of British Insurers, the industry is working on these issues. As yet, there have not been any changes and no insurer will be forced to change its definitions. Like customers and advisers, insurers have a choice: some insurers will compete on wide ranging definitions, others will compete on price.
Advisers and consumers have nothing to fear from these natural developments, indeed they can take comfort from the protection industry being on top of the issues. CI insurance is a long-term contract and existing definitions will be used for existing business. Those customers with guaranteed premiums will not see any change in premium. Life offices with customers on reviewable premiums will have to decide on their own customer strategies. For new business, either definitions will change or, rather like the price of petrol, prices will rise to reflect market conditions.
