A world of difference

Although accurate and consistent figures are hard to find, it is true that sales of critical illness (CI) cover have shown exceptional growth in all countries except the US.

Interestingly, the US was one of the first countries to offer cancer insurance, in the 1970s. This typically paid part of the sum assured in advance upon diagnosis of cancer. However, the policies had a reputation for being a hard-sell, with high levels of commission and low claim payouts ' mainly due to disputes over policy wording and stringent policy conditions. Eventually, they were regarded as poor value for money and were banned in many states.

However, these policies have recently made a comeback in some states and many US insurers are bullish about their future prospects. In 2001, for example, New York State approved its first critical illness wording. The concept that the policy will pay a fixed sum upon diagnosis of a certain specified illness is the basis upon which all CI policies are sold.

In theory, we should expect differences between countries because of social and legislative reasons ' most notably the differences in healthcare provided through both public and private channels.

Intergration

The first 'modern-day' product, sold in South Africa, did make an attempt to integrate with state benefits. It paid a sum assured of SAR25,000 ' the cost of a coronary by-pass operation. In South Africa, there was no public healthcare and these days South African policies pay reduced benefits for minor ailments.

However, the technically correct solution is often quickly superceded ' what sells will always beat what is best. The message, 'if you have a heart attack, you will get a big lump sum so you can live your last few years like a lord,' is certainly much more powerful than 'if you have a heart attack, we will pay to get you fixed so you can get back to work as soon as possible.'

So although there is some variation seen in different parts across the world, this same basic concept applies to all policies sold worldwide.

The first polices paid part of the sum assured upon diagnosis of cancer. The first modern policies were introduced in South Africa in the early 1980s and typically covered four conditions: heart attack, cancer, stroke and coronary artery bypass surgery.

The number of conditions covered under CI varies significantly from country to country, with up to 35 conditions covered in the UK. This is purely down to the sales process ' being able to say, 'we cover more illnesses than anybody else in the market' was considered a powerful sales tool. So newcomers in the market always aim to cover more conditions than the current players. With any product where the policyholder can make money at the insurer's expense, there is a risk of anti-selection. This definitely applies to CI polices where one of the aims of the insurer is to reduce the incidence of anti-selective early claims.

Learning from others

In Australia, Canada, South Africa and Europe, policies will commonly have a period at the start of the policy '  the moratorium ' where policyholders cannot claim for conditions that cannot easily be detected as part of the underwriting process, such as multiple sclerosis or breast cancer. The aim of this is purely to reduce the impact of the early anti-selective claims.

UK providers may meet any such change to the product design with resistance, but if the other companies in the market introduce a moratorium, then other companies must introduce one or risk further anti-selection.

Should the insurer have the right to review premium rates once the cover has started?

This right exists in some countries, for example, the Australian market and about one-third of the Canadian market operate on this basis. In the UK, reviewable products do exist, but sales of these products are exceptionally low. There could be two key reasons for this:

l The differential between guaranteed and non-guaranteed premiums is small (less than 5% of the premium). This is mainly because insurers and reinsurers are not charging enough for the guarantee.

l There are a number of companies offering guaranteed products. Most IFAs will naturally lean towards the guaranteed product, for fear of being accused of recommending the wrong product if the insurer subsequently increases its premium later.

As such, the policyholder is likely to opt for the guaranteed product, especially if they are dealing with an IFA. In the UK, many reinsurers are either withdrawing from the guaranteed premum market, or trying to charge more for the guarantee.

It will be interesting to see the extent to which guaranteed premium rates exceed non-guaranteed rates and whether the market moves to a reviewable rate basis.

Pick and mix

One feature of the South African market is the ability to choose the conditions for which you are covered. This is theoretically an excellent answer to the problem, in that the policyholder only pays for the cover they want. For the insurance company there are complexities, in terms of pricing, underwriting and administration.

On top of this, the complexity of these products has meant sales have not been as high as expected from the providers who were pushing for their introduction. Perhaps the reason for this is if an adviser decides to exclude condition X, then they will be paid lower commission and also leave themselves open to be accused of improper advice further down the line.

Being paid less to do more work and increase the likelihood of complaints seems like a recipe for disaster. Most sales in the US are made at the workplace ' this has also had limited success in Canada. Some expect worksite sales to increase in the future, in both Canada and the UK.

Although there is the attraction of having a captive audience for the adviser to target, there could be a number of problems, one of which being the adviser will need to get past the employer before they can consider selling to the employees.

Certainly, in the UK there are few employers who would, during work time, allow advisers or insurers to sell to their workforce. If the seminars took place out of work time, very few employees would attend. And of those attending, how many would buy?

On top of this, the experience in the US is that if the quality of the enrollers is poor then so is the quality of the business, either because of low take-up or poor persistency. Last, the policy size in the US tends to be fairly low, typically US$30,000.

At present, it is difficult to say what will happen in the UK. Two things we know for sure are that the product has been very successful during the 1990s but it will need to evolve if it is to have a successful future.

Time will tell as to how far and how quickly the current product changes, and there is much we can learn from our experience from overseas. But one thing that is certain is when we look for ideas and innovations it is always worth looking at other people's ideas first.

Jason Hurley is head of business development at RGA Reinsurance UK