As guaranteed critical illness rates become more expensive and sales start to slow down, Johanna Gornitzki asks if this golden product has finally reached the end of the road Click here to download pdf
For many years, individual critical illness (CI) was seen as the number one product in the protection market. Sales were high, premiums affordable and the market continued to see year on year growth. However, changes in the sector, particularly in the last 12 months, have prompted a shift in opinion as sales of individual CI fell by 18.5% for the first time in over ten years, according to the Association of British Insurers.
The outlook for this year is not looking much brighter, with industry experts predicting that sales for 2004 will either remain stagnant or continue to drop even further. Bernie Hickman, protection actuary at Legal & General, says sales of individual CI appear to have fallen by approximately 15% over the last 12 months.
Hickman believes the rising cost of guaranteed CI rates in particular, has prompted consumers to rethink the product's sustainability. Rising house prices have also put a strain on the CI market, especially considering the majority of people opting for CI cover would do so when taking out a mortgage. "Affordability is an issue, especially in connection with high mortgage costs," Hickman says.
Hickman's view is shared by Roger Edwards, products director at Bright Grey. "Over half of all critical illness sales are taken out to cover mortgages, and with house prices rising to record levels, the amount of cover needed to protect a mortgage is higher. Therefore, critical illness becomes more expensive on top of this as the premium increases. Consumers only have a set amount of money that they are prepared to spend on protection products so they may not be prepared to spend to these higher levels," he says.
With these problems in mind, what can be done to ensure individual CI remains affordable? Tightening definitions is one possibility. Hickman believes this is a must if the product is to retain its affordability. "We need to refocus the product and go back to the drawing board. We need to remember what the product is supposed to be and what it was designed to do," he says.
Affordability
The need to tighten definitions is an issue that continues to spark debate in the industry, particularly in light of recent medical developments, which has left the industry questioning whether some forms of disease such as cancer and stroke are still considered to be a critical illness.
A recent seminar held by reinsurer, Gen Re Life Health, debated the future of CI definitions. Professor of cancer medicine, Karol Sikora, of the Imperial College & Hammersmith Hospital, forecast in the industry that by 2014, cancer would have become a chronic and controllable disease instead of a critical illness. The reason for this is because new technology will improve both the detection of certain illnesses and the discovery of pre-malign changes. But while Hickman believes something has to change when it comes to the product's structure, he is averse to the idea of transforming the product altogether.
"There has been much debate in the industry about developing a product that dovetails critical illness and income protection, and while this is a good idea in principle, it won't work unless it addresses the issue of income protection, which includes the uncertainties around pay out," he says.
Edwards, on the other hand, thinks tightening definitions could be combined with some degree of creativity. "One example could be adding in a second trigger that measures a degree of severity. For example, the claimant would have to pass the cancer definition and the severity definition," he suggests.
That said, he warns that the industry needs to treat inventions carefully. "We have to be careful as an industry that in developing these ideas, which aim to limit the effects of medical advancements, we do not create a product that is very difficult to understand and could store up problems in the future when claims are turned down.
"This could lead to a more complicated product that people will find difficult to understand, or will need to be explained much more clearly," he adds. Overall, innovation seems to be high on the agenda. Trevor Whiting, IFA at advisory firm Keith Scott, believes the industry needs to create a type of product that places emphasis on the actual conditions.
"Currently, the underwriting process is very difficult, and this has driven away some IFAs. The market will carry on being flat until we re-invent the package," he adds.
Rationalisation
Also keen on product development, Helen Collins, IFA marketing manager at Liverpool Victoria, says the market will see a more tiered approach to CI protection products over the next 12 months.
"The rationalisation of critical illness and other future plans may see the product include a variation of available options, such as bronze, silver and gold, with gold being the most comprehensive but therefore by definition, more expensive. It takes product flexibility one stage further. But if this type of contract is available in the UK, then IFAs will need to ensure that this is part of a flexible contract so that it can change as their clients' needs change," she says.
While CI cover may take on a slightly different shape or form in the future, the insurance market itself is also gearing up for a new working environment, with Financial Services Authority (FSA) regulation coming into effect in January 2005. Views on how this will affect sales of individual CI protection differ, but while the majority of the industry seems to think it will not make much of a difference, some believe it could have positive as well as negative effects on the market.
Edwards suggests regulation could have a positive effect on sales of income protection (IP), which could eventually have a knock on effect on sales of CI. "It is probably too early to say what the effect will really be, but the reality is that critical illness is often sold as an alternative to income protection when in fact, they should be complimentary products," he says.
However, Peter Chadborn, IFA at Chadborn Baker & Kearle, thinks the FSA regime, with its option for advisers to offer both simpler stakeholder products as well as menu-based propositions, will eventually lead to a 'dumbing down' of the industry.
"Although regulation is likely to increase the overall sales of individual critical illness, I do not think this will necessarily happen in the right way. There are initial obstacles to overcome," he says.
Regardless of what impact regulation may have on future sales, the fact remains that dipping sales figures are a direct result of escalating rates and the fact that several providers, including Scottish Equitable Protect and Prudential, have withdrawn from the guaranteed market.
Looking ahead however, this could be changing as several providers have decided to return to the guaranteed market. In November, Edinburgh-based insurer Bright Grey introduced guaranteed rates on life and CI cover as part of its protection menu. AXA Sun Life, which launched its protection business in the same month, also decided to enter the guaranteed market. Moreover, it has also been rumoured that Scottish Widows is to launch guaranteed rates early in 2005.
Obstacles
Whether this trend continues is another thing, however. Whiting warns that although providers such as AXA and Bright Grey will be entering the guaranteed market, support for guaranteed CI rates will not last forever. "Guaranteed critical illness rates will only be provided over a limited period of time. Insurers will turn the tap on and off when it comes to guaranteed rates," he says.
Despite this, the decision by these players to enter the guaranteed market when others have pulled out is a strong sign of the strength of the market. Figures show that the majority of sales are still based on guaranteed rates, which proves that the product is still valued by advisers and the public at large. But only time will tell if new entrants and a renewed passion for guaranteed rates will help the market flourish again.
