Bright Grey launched into the guaranteed critical illness market at the end of 2004. Is the sector heading for a revival and will other providers follow suit?
Market views
Jason King, Life Policies Direct
Guaranteed critical illness (CI) products have to be split into the accelerated life/CI market and the standalone CI market.
The former is showing signs of considerable strength and concerns among advisers of its demise have proved unfounded. 2004 saw the number of IFA providers in this market fall to eight. However, Bright Grey and AXA's recent launches bring this figure up to ten and this is likely to grow to at least 12 or more in 2005, with Royal Liver, Scottish Widows, Scottish Equitable and Prudential all being possible entrants.
The market has received tremendous support from GE Frankona and the consumer appetite for guaranteed rates in the face of steep price rises has surprised the market as a whole. Attracted by margins not available 18 months ago, reassurers are also entering this market again. Rates appear to have stabilised and some healthy competition could even generate minor rate reductions.
However, for standalone CI the situation is less rosy. Scant consumer demand is generating little support from providers with only three currently operating in the IFA market. In an environment where accelerated CI offers better value, this situation is unlikely to improve. It looks like guaranteed rate CI on an accelerated basis is here for the medium term at least. However the market will still see innovation in product design as reassurers, providers and regulation turn the focus away from lump sum benefit to income based solutions and redesigned income protection products.
Ronnie Martin, Adalta Consulting
Providers continuously seek to develop opportunities in the CI market if they believe they can do so profitably. As a result, with many advisers and customers still preferring guaranteed to reviewable pricing, it would be no surprise, during this period of realignment, to see other providers coming in with guaranteed products.
Any revival in the sector however is not solely dependent on the pricing bases but more so on customer recognition of needs for the cover coupled with their willingness to meet the costs.
A high percentage of CI business is mortgage-related and current predictions for the housing market do not indicate growth will come from that source. As a result, affordability and choice will become even more crucial for revival in this market and an ongoing facility for advisers to offer both guaranteed and reviewable contracts will therefore be important.
Many may still prefer the comfort that guaranteed rates bring. However, it could become increasingly common that the premium difference reaches the 50% mark, in which case advisers may well prefer to use that difference to arrange 50% more family protection cover at a time when it is needed most.
Another attractive and efficient feature of choice can be the income benefit route for family protection. This has the added benefit of addressing affordability as well.
If other providers return to the guaranteed market then competition could result in premium reductions. Nevertheless costs, particularly for smokers, will remain significant and reviewable rate products provide a valuable alternative.
Andy Savage, Jardine Lloyd Thompson
Consumer choice should be at the heart of every provider's philosophy and by offering both guaranteed and reviewable CI rates, this demand can be fulfilled. Inevitably therefore, in a bid to give customers the choice they want, many providers will be re-entering this market.
If providers want to show they are taking on board feedback from advisers, and are keen to be a serious player in the protection market, they will ensure they offer guaranteed rates as an option.
With the market looking less volatile at the moment – and certainly more stable than the last couple of years when there were doubts regarding the longevity of guaranteed rates – and the increased appetite from reassurers to re-enter the sector, we should expect to see increased competition in the market.
The ability to cater for consumers' demands is something that providers need to react to, so if demand for guaranteed rates is still there – and the evidence shows that this demand is still very strong – then I am sure we will see providers like Scottish Equitable Protect coming back into the market with guaranteed life with CI rates.
Ultimately, customer choice is important, particularly when the cost of guaranteed rates is increasing.
Richard Verdin, Direct Life & Pension Services
While it is expected that there will be one or two more announcements concerning providers entering the guaranteed CI market in the near future, revival is not the word to use.
Guaranteed premium CI policy sales have declined over the last 12 months and there are a number of reasons for this. The first is that there are now lower cost alternatives in the form of reviewable premium contracts widely available. Another is that the increases in pricing for guaranteed premiums seen over the last 12 months have had their impact, and finally the sometimes heavy criticism of CI policies, generally, in the press and on television have helped to harden consumer attitudes to such policies. All these factors are now combining with the significant downturn in housing market transactions, from which the vast majority of critical illness sales emanate, to depress sales further.
The result of these factors is that reinsurers are finding themselves with 'spare' capacity, which they can make available to those companies that have not previously, or recently, offered guaranteed premium products. Looking forward I expect the introduction of regulation to further suppress sales during the first quarter of 2005, increasing 'spare' capacity further. However as we all become accustomed to the new regime there may well be a mini bounce-back as advisers, seeing their incomes reduce, work harder to increase their penetration of protection products on the back of mortgage and other sales.
