With the current definitions for critical illness set to change, Nick Telfer asks which way now for the CI market?
As the Association of British Insurers (ABI) prepares to issue its latest Statement of Best Practice for critical illness (CI) cover, perhaps now is the time to consider whether the current proposition suits the demands of today's consumer, adviser and product provider.
Since the publication of the last ABI Statement in 2002, the industry has considered many ways in which the balance of power can be placed back in the hands of the insurers and reinsurers. After all, an existing client with a policy incorporating guaranteed premiums, definitions and insurability options already has plenty of future-proofing.
Misunderstanding
Yet for all its desire to change, at least publicly, there has been very little material evidence that the industry is seriously looking to bring the whole protection concept into the 21st century. So while the appetite for cover against the financial implications of serious illness and incapacity is undisputed, it is questionable whether the plans we have now represent the best vehicles to do this.
One fundamental problem with CI is that, for most conditions covered, the decision to pay a claim is based purely on medical diagnosis with no consideration given to the impact on the lifestyle or the financial wellbeing of the claimant. The result is that the same amount is generally paid out whether the person spends a couple of days in hospital having an angioplasty procedure, an event still covered by over a quarter of plans, or spends the rest of their life in a wheelchair following a major stroke.
This is clearly unreasonable and may well affect a purchaser's behaviour, encouraging them to over insure by focusing attention on a big payout linked to a relatively minor event. It could possibly even suggest to the client that the policy is a lottery with a set prize. This may well not help retention either as, after a couple of years without a 'win', they may cancel the policy.
Alternatively, consumers may attempt to weigh up their chances of contracting, say, cancer and surviving. Despite the myriad of statistics presented by the product provider and adviser, they may well make this assessment based on personal experience, for example, if a colleague has had a benign melanoma.
In an attempt to simplify the issues, the industry has increased the potential for misunderstanding. For example, cancer, a condition covered by all plans, may be assumed to cover all cancers. But it does not. Descriptions such as 'certain cancers' or 'life threatening cancers' would more clearly illustrate that there are restrictions to the cover and prompt further investigation.
Since 1994, the average number of conditions covered has grown from 16 to 28, with some plans in the current market now offering cover for nearly 40 separately defined illnesses or procedures. One must question the value added by that myriad of additional conditions, particularly when one considers the incidence rates of many of them.
Even if the price impact of the inclusion of the low incidence conditions is small, ultimately the use of condition inflation is evidence that the current proposition has wavered from addressing a client's need into a macho numbers game. The risk of this is that consumers are lulled into a false sense of security by thinking that the number of conditions covered is directly proportionate to the likelihood of a claim.
Product providers have unquestionably been guilty of reinforcing this notion by adding high profile conditions that have negligible incidence rates, such as Creutzfeldt-Jakob disease, HIV/Aids, motor neurone disease and progressive supranuclear palsy. Advisers, who feel forced to collaborate with this charade because of the increasingly litigious environment in which they operate, may be encouraged to make product recommendation a purely quantitative exercise based on the balance between cost and the number of conditions, rather than an assessment of the quality and future flexibility of the plans.
Perhaps now is the time for the ABI to encourage member companies to publish incidence rates for all conditions, to enable consumers and advisers to make a more informed judgment about the real value.
So far, UnumProvident is the only provider that has been brave enough to push the boundaries with its Elixia 123 product. In very simple terms, the plan splits the conditions into three categories, life threatening, disabling and traumatic, and allows the amount paid for each category to be different. The result is the ability to structure a plan where the cover and amounts payable are much more reflective of the impact of the condition and the premiums are lower.
Revolutionary
If the industry is at a crossroads, it is likely that even more radical product development will be required, either by an evolution of the current product model or possibly a totally revolutionary offering. It is likely that the differing demands of the various distribution channels will mean that providers seriously committed to the protection market will need to consider taking both roads.
As a starting point, one possible option is to continue with the product in its current form but to pare back the number of conditions and remove the hype. In an age where regulators are obsessed by the concept of simplicity, there may be scope for a stakeholder CI plan, that only provides cover for the five conditions that make up 90% of claims, together with an activities-based total permanent disability (TPD) option.
This essential cover product would be the bedrock advice policy. While possibly better suited to direct mail and basic advice models, it would still be attractive to IFAs who cannot convince clients to take the more complex and expensive option or to those who are looking to provide an off the peg solution for an easily identifiable need such as mortgage protection.
The growth in popularity of the menu concept clearly demonstrates that a number of providers recognise that there is a real need for a product that moves forward from a simple price driven proposition towards a more holistic financial planning approach.
Flexibility
Despite their flexibility, the current menu plans still have roots in the traditional benefit types and take little or no account of the overlap in risk between, for example, CI and income protection (IP). Decisions about the levels and types of benefits are made at the outset, and while the amounts can be varied relatively easily, the balance between lump sum and income for example, is more difficult to alter on many plans. Furthermore, using the traditional plan structure means that on payment of a claim for one illness, the cover ceases although the need for cover does not.
The inclusion of the Red Arc counselling services within the Bright Grey proposition and the Best Doctors service offered by BUPA and Skandia, demonstrates that some providers are offering a greater commitment than just the issue of a cheque.
While Scottish Provident has included a hospital cash plan option in its offering, the integration of private medical insurance (PMI) has to date been largely ignored.
There is definitely scope to develop the menu concept further by offering fewer but broader definitions reflective of the type of condition, with the benefit payable appropriate to the condition and the degree of impact.
Discovery Life in South Africa has used this approach and, although the plan structure appears complicated, the concept behind the cover is blissfully simple. At its heart, a fund is used to pay claims with benefits expressed as a percentage of the fund. On payment of a claim the fund reduces, however the plan continues with the balance available for further claims. If required, the fund can be topped up or even include an element of protection. The plan therefore recognises the reality that a claim does not remove the need for continuing protection for the claimant.
Within the severe illness element of the Discovery plan, there are 17 definitions split into three categories. These definitions are far wider than those used in the UK, grouping together conditions that affect, for example, related parts of the anatomy. Underlying each of these areas are seven severity hurdles defined by an objective measure with an appropriate proportion of the benefit paid according to the impact.
It is possible that the UK market is not ready for such a revolutionary proposition, however there must be alternatives that could suit our market.
The premise of much CI advice is that the consumer wants, or needs, a lump sum on diagnosis and that they are happy for this to come out of their life assurance benefit. The reality is that if you ask different people what they most need at the time of diagnosis of a critical illness, it is quite likely that answers would be diverse and would depend on the nature of their condition and financial circumstances at the time.
The route to the future can be found by revisiting the variety of client needs that develop when illness or incapacity strikes and by developing a single proposition that provides, as appropriate: lump sums to clear debt; pays for medical treatment or home modifications; a regular payment to replace lost income; and services to arrange medical or care services.
Nick Telfer is head of life & protection at Defaqto
COVER notes
• One fundamental problem with CI is that, for most conditions covered, the decision to pay a claim is based purely on medical diagnosis with no consideration given to the impact on the lifestyle or the financial wellbeing of the claimant.
• The risk with the growing number of definitions is that consumers are lulled into a false sense of security by thinking that the number of conditions covered is directly proportionate to the likelihood of a claim.
• In an age where regulators are obsessed by the concept of simplicity, there may be scope for a stakeholder CI plan, that only provides cover for the five conditions which make up 90% of claims.
