From its conception by Dr Marius Barnard to its current incarnation, critical illness cover has changed dramatically. Bonnie Burns reports on how the product must continue to move with the times.
Over the last 18 years, the critical illness (CI) market has changed significantly. Definitions have been updated, conditions have been added and pricing has become more sophisticated. Insurers have had many different types of policies on their books and someone taking out cover today will have a very different product to someone who took a policy out in the early 90s.
It is crucial, therefore, that providers of CI spend a lot of time researching the needs of customers and how these needs change. They also need to analyse demographic trends in order to support protection business. For example, there is an increasing trend for longer policy terms and larger sums assured as the housing market continues to sky-rocket.
As many people may be aware, house prices have more than doubled since the turn of the millennium, average mortgages have become larger, and a greater proportion of income is now going on mortgage payments than in the early 90s. Potential homeowners who still want to get on the property ladder have responded by extending mortgage terms from 25 to 30 and in some cases even 40 years. Add into the pot the five recent interest-rate rises, and it is clear that borrowers have become thinly stretched.
All the more reason for these borrowers to protect their debt and their standard of living with CI cover. The vast majority of CI claims are a result of the big five conditions - cancer, terminal illness, heart attack, multiple sclerosis and stroke.
If today's homeowners are taking out mortgages for up to 40 years, then people should take out a CI policy to cover them for the same period of time. Otherwise they seriously run the risk of not being able to pay their mortgage if they fall ill from a critical illness when their policy has elapsed. The choice is either to hope for the best or take out another policy when they are older and premiums possibly much higher. If one makes the assumption that the older someone gets, the more likely they are to get ill, this is the point at which the customer needs cover.
Obviously, providers will not just be interested in what illnesses people suffer from, but also the diseases that are the biggest killers - cancer, cardiovascular disease and respiratory disease.
Fear factor
Cancer is perhaps the public's biggest fear. In terms of life expectancy, the impact of cancer varies depending on what type but, on average, cancer reduces the expected lifespan of an adult sufferer by 15 years. Those working in the protection industry make distinctions between different types of cancer for the purposes of CI cover. Most malignant types should be covered, including leukaemia but not tumours that are described as pre-malignant, non-invasive or cancer in situ. The true incidence of cancer over the longer historical term is difficult to track reliably since the increase in rates over the course of the 20th century may be due to improvements in and greater access to testing facilities.
Socio-economic factors can be seen to have a strong impact on an individual's likelihood of developing cancer. Smoking, for instance, which has a direct link to 90% of all cases of lung cancer, is more common among manual workers than among non-manual workers. There are also strong indications of a widening gap between different social groups in terms of the likelihood of developing lung cancer. This has been due to the increase in smoking by individuals belonging to lower socio-economic groups. In 1974, manual workers were 24% more likely to smoke than their non-manual counterparts while, in 2000, this figure had risen to 52%.
Research conducted by Legal & General into demographic trends shows that while cardiovascular disease is still the leading cause of death in the UK, the mortality rate from such diseases has been in steep decline since the 70s. This is likely to be a result of the fact that medical developments have meant that people are more likely to survive a heart attack. In this scenario, CI cover could help a customer maintain a standard of living that they would not have otherwise enjoyed.
The third biggest killer, respiratory disease, is any disease associated with lungs, bronchi, trachea, mouth, or nasal cavity. Respiratory diseases account for around 14% of all disease-induced deaths in the UK each year. Ideally, respiratory failure of an advanced stage resulting in the permanent need for regular oxygen treatment and permanent impairment of lung-function tests should be covered.
Changing demographics, in particular the health and lifestyle issues mentioned above, therefore, have a significant impact on how companies set their premiums.
Reviewable CI cover remains a viable and cost-effective option for anyone tempted to save money. It is a valid choice for those on a very tight budget, since, guaranteed premiums have been falling since reviewable CI cover was introduced. For a small increase in premium, customers could buy the certainty or guaranteed CI cover rather than going down the reviewable route.
Modernising CI cover for today's changing customer needs is vital. Medical definitions and advances must be monitored. However, sticking to a straight-forward, value-for-money proposition rather than giving weight to fringe benefits, which can be unnecessarily complicated, is the best option. For example, buy-back cover after a claim - tight restrictions may make it difficult to benefit and these features are unnecessary.
So what does the future hold? Improvements in screening may help prevent heart attacks or catch certain types of cancer at an early stage to allow treatment. Advances in the pharmaceutical industry or surgical expertise may increase survival rates from certain illnesses and conditions. While there is no crystal ball, the industry should try to 'future-proof' the product against medical advances. For example, by relaxing their approach to claims for heart attacks earlier this year, and by removing the requirement for 'typical clinical symptoms (such as chest pain)' from the model definition. At the same time, the definition of aorta graft surgery should be changed to cover traumatic injury.
CI cover is easy to discuss as part of a life sale and provides valuable peace of mind for a client. The industry should not forget that most people without cover probably have not thought through how they would cope if they were to become critically ill. It is simple to add CI on to a life policy and insurers should help to simplify the underwriting process by using services such as an interactive underwriting system. This system tailors questions to the disclosures made, meaning fewer questions will be asked. More applications would be underwritten at point of sale, saving valuable time.
While the market continues to change, providers of CI cover should continue to try and adapt to customers changing needs. It is critical that this type of protection remains contemporary and relevant. n
Bonnie Burns is product marketing director at Legal & General
