As more insurers push reviewable critical illness contracts, Ronnie Martin explains what advisers should tell their clients
Careful planners are able to ensure that periods of prosperity roll into each other, so minimising lean times. In the critical illness (CI) market, we now face the challenge of ensuring the recent good times experienced by providers and advisers don't come to an end.
The good times have been rolling primarily because current CI products appeal to customers, distributors, providers and reinsurers alike. The prolonged housing boom has also helped provide a sales platform for mortgage-related CI cover. However, advances in medical science are impacting the underlying risks associated with guarantees on CI plans. This impact means that, for guaranteed products, the affordability buffers are getting closer.
Planning ahead
While today's generation of guaranteed products are still available in the market, there are also alternatives emerging - so there is time to plan ahead. Reviewable products provide an alternative for today's customers, although, for some, this route might be taken with some trepidation. It all comes down to what customers understand by the word "reviewable" - and that may be driven by differing experiences of reviews.
The most familiar reviewable products are flexible whole-of-life plans. The review typically takes into account current premiums paid, value of the policy at the time of review and charges, and takes a view on future investment returns.
For "maximum cover" plans, a substantial increase in the premium will always be required to maintain the existing level of cover. The picture is quite different, though, for reviewable term assurance policies, which are pure risk contracts with no investment link and no equivalent to the maximum cover approach.
It is important that customers are aware exactly on what basis any review is conducted. There are a number of variations in the market, which need to be carefully analysed.
In straightforward terms, this is how reviews generally operate under current CI policies:
oOo-#149; Reviews will be carried out at the fifth anniversary and every five years thereafter to determine whether premiums need to change.
oOo-#149; At a review, the underlying assumptions relating to the expected future number and timing of claims made for the type of policy will be assessed.
oOo-#149; This will include an analysis of the provider's claims experience, industry claims experience and the expected impact of future medical advances.
oOo-#149; Changes to premiums will be assessed fairly to reflect any changes in the underlying assumptions outlined above.
oOo-#149; If the premium level indicated by the review is within 5% of the current premium, the premium will not change at that review.
oOo-#149; An individual customer's current state of health when the review is conducted is not taken into account.
Once customers fully understand the basis of review of their policies, they are then in a position to make an informed choice between guaranteed and reviewable premiums that best suits their individual situations.
New steps …
It is the uncertainty of the impact of medical advances on future claims that is the biggest issue for guaranteed-premium contracts, and alternative concepts to address this problem are being debated in the industry.
Until now, it has generally been the voices of providers and reinsurers that have dominated the debate. However, advisers now have the opportunity to influence the design of products they will be recommending in the future. Not only do advisers have the benefit of point-of-advice knowledge, many also have clients who have been the subject of CI claims.
So what might the future hold? First, providers could continue to guarantee affordable premiums on product concepts that pay benefits when lifestyle is impacted through inability to work on suffering a critical illness. This might be delivered through a combination of lump-sum and monthly payments.
Alternatively, affordable guaranteed premiums might be possible by limiting benefits under less severe forms of heart attack, cancer and stroke, and having major benefits payable only when a policyholder suffers from a more severe form of these illnesses.
Finally, renewable products, with their inherent flexibility, could well offer an attractive alternative on which to move forward.
Whatever the future holds, the time is right to conduct full and open debate and to provide a platform for advisers to air their views. And with today's products still available, the good times can continue to roll - for a while - as the debate goes on.
Ronnie Martin is the protection director at Legal & General
COVER notes
oOo-#149; Many CI insurers are introducing reviewable products as the price of guaranteed contracts continues to rise.
oOo-#149; Unlike reviewable whole-of-life policies, term contracts are less likely to see substantial increases at review, as they are not investment-linked.
oOo-#149; Clients should be made aware of the exact basis used to review CI rates, as it can differ between insurers.
