While applauding the ABI's latest on Total and Permanent Disability, Ian Jefferies says Critical Illness cover needs innovation if sales are to improve
As the protection market has become more competitive over recent years, so too has the complexity of its proposition. We all know that customers over-estimate the likelihood of death and under-estimate the likelihood of critical illness or another type of injury meaning that they cannot work. As a result, customers are left with a false sense of security – a major dis-satisfier when their expectations are not met during their time of need. It’s time for the industry to look at new ways of presenting the product. Innovation and attention to consumers’ needs and expectations are key to unlocking its potential.
Stumbling blocks
To invigorate the market and bring meaningful innovation to the product, it’s essential to look at the issues that affect critical illness (CI) sales. One of the main stumbling blocks is the lack of understanding among consumers of what the product is and what it does. Far too often consumers confuse CI insurance with income protection (IP). This can be seen in research carried out recently by both the Association of British Insurers (ABI) and the FSA.
For example, the ABI’s research (Critical Illness and Total Permanent Disability Research – Strictly Financial, July 2009) highlighted the misconception that CI cover paid out when someone was unable to work. Among the comments from respondents were: “You’ll be covered for a period of time, if you’re out of work because of illness”, and “I see it as replacing your wages while you can’t work and you’re having treatment”.
On top of this it found there was confusion about the way benefits are paid on CI cover, with some respondents, especially those who didn’t have cover, thinking they were paid out in the form of income or as a combination of income and a lump sum.
The FSA’s research (Post-implementation review of ICOBS: Oral Disclosure Rule in sales of critical illness – baseline survey) also revealed confusion about CI cover. It found 68% of policyholders believed they could claim for any illness that meant they couldn’t work.
This lack of understanding leads to two main problems. First, as they don’t understand the cover they have, policyholders can have a false sense of security about what they’ve bought, understanding might only occur at the point of claim. Clearly this is too late. Further, without an understanding of the product, potential customers might not associate it with their needs and a sale will be lost.
Clarification and greater understanding of the benefits of CI insurance are clearly needed if sales are to increase. With this in mind, the ABI’s announcement at the end of November that it will rebrand and standardise definitions of the total permanent disability benefit in critical illness cover is welcome news.
Unfortunately, the industry’s attempts to demystify CI insurance haven’t always been successful and the ABI’s preliminary research into the new total and permanent disability definitions only serves to support this. When it carried out qualitative research into consumers’ understanding of the ten proposed replacement definitions for total and permanent disability last summer (Strictly Financial 2009), although some definitions were easy to understand, for example loss of a hand or foot and loss of physical ability to look after yourself, others left respondents confused. For example, when asked what they understood of the heading ‘cardiomyopathy’, although most respondents were able to say it concerned the heart, none of them knew what it meant. Similarly, the heading ‘specific surgery for severe back and neck conditions’ left respondents baffled, with many questioning exactly what severe meant and how much of a recovery surgery would result in.
Perhaps even more telling is one of the comments from a policyholder when asked about the conditions that would trigger a CI claim. This was: “Anything that stops you working, I think. I know there’s a list but I’ve never read it.” If policyholders aren’t even reading the definitions, will it really make any difference if we make the definitions easier to understand? And, given that this will make the list longer, chances are that consumers are even less likely to read it.
But, while this research was very much preliminary work, and the ABI has stated it will also introduce consumer education to support the new definitions, for the market to really grow, other approaches to product development are clearly necessary to reach those consumers that still won’t understand or engage with the product.
There’s also a risk when you replace one definition with a list of conditions, it fuels providers’ desire to have the longest list. In a bid to differentiate, more conditions will be added to the lists, leaving consumers less likely to understand what’s covered or to even read the list.
Fulfilling customers’ needs
The CI industry needs to look to solve customers’ problems through real innovation. CI insurance must be easy to understand and align with customers’ needs to give them real peace of mind about their cover.
Therefore, instead of adding to the confusion, the industry should look to build on customer expectations of the product. As highlighted by the research conducted by both the ABI and the FSA, a common misconception about the product, even among policyholders, is that it will pay out for illnesses and injury that prevent someone from working.
While this points to the need for income protection, this has also failed to be a major seller with consumers. Criticisms often include it being difficult to understand, especially due to the occupational classes; unnecessary, as consumers focus more on the risk of premature death rather than long-term illness or disability; and unaffordable.
Indeed, some of the features of CI cover do appear to give it the edge with consumers. When it comes to sales, CI cover sales are more than three times those of income protection.
Consumers do like the lump sum payment, perhaps because it is similar to the term assurance model with which they’re familiar. And, although there’s clearly some confusion, they also appear to be able to identify with the conditions covered, in particular cancer, heart disease and stroke, which reinforces the need for cover.
Given this, perhaps it would be more appropriate if the industry developed a critical illness insurance product that, as well as paying a lump sum on the diagnosis of the conditions, also provided financial protection in the form of regular payments, like income protection, if they were unable to work as a result of illness or injury.
As an example, we have introduced to the market a temporary disability rider to CI, which means that in the event of someone being unable to work for a set length of time as a result of illness or an injury that hasn’t resulted in a lump sum payment, we can provide a percentage of the sum assured each month.
Like income protection (IP) this payment stops if the policyholder recovers and returns to work, with any remaining sum assured available for future claims. Alternatively, should they be diagnosed as having a permanent disability, this would generate a claim for the remaining sum assured.
Adding this aspect of IP to CI insurance in this way would meet consumers’ expectations, which would help to reduce the potential frustration and disappointment at claim. No one should forget that part of the motivation for the ABI’s overhaul of total and permanent disability is to increase the payout rate, which at around 50% is significantly lower than the 90% or so of claims that are paid for the other conditions.
It’s also essential that the insurance industry doesn’t simply look to product development to deliver innovation. To truly innovate and develop products that are meaningful and meet customer demands it’s essential that the industry provides a service that is effective and responsive. Customers are buying a promise that the insurer will pay out if they are unfortunate enough to need to make a claim; this won’t stack up if they have to wait weeks to have their application processed.
To ensure this happens, insurers need to invest in their systems to improve the process for both the consumer and the adviser. Giving the adviser the ability to move from quotation through to placing someone on-risk quickly and simply is essential.
As well as slick administration systems, more dynamic underwriting can streamline the application process and reduce the need for consumers to produce additional medical evidence. Having to provide more information can be frustrating as well as a sales deterrent.
Having these slicker, more responsive systems in place not only significantly improves conversion rates but also increases customer satisfaction. In turn this helps to deliver the peace of mind that, should something unexpected happen that necessitates a claim, this process will be as simple and straightforward as when they took out the policy.
Ian Jefferies is head of sales & marketing at Fortis Life
