Children's critical illness made headlines last year after a sharp jump in claims. Peter Madigan explores this often overlooked area to see if the end is nigh for this 'free' benefit
When taking out critical illness (CI) cover, ensuring that children are covered under the policy may not always be at the top of the agenda. On the whole, individuals take out cover to run the course of a mortgage and employers' primary concern is the effect of CI cover on the bottom line.
Such indifference seems strange however, when you consider the impact of a sick child on a parent's life, both personal and professional. It is arguably as much in an employer's interest to see to it that a staff-member can afford the best treatment and care for an ill child to ensure that they are not absent from work for a long time. So when they are working, they can get on with the task at hand rather than fret over their child's condition. Why then is children's CI cover such a neglected topic?
Blanket coverage
The simplest explanation is that children's CI is part and parcel of almost every CI policy on the market, both in the group and individual sector. Add to this the fact that all but one provider offers the benefit free with a CI policy, it is hardly surprising that it is given very little discussion.
"Even though we all refer to it as free cover it isn't really free at all. Children's critical illness benefit is priced within the overall rate for a policy," says Jason King, managing director at Life Policies Direct.
So well established is children's CI provision that almost all major protection providers include it in their policies as standard. Canada Life offers child cover for an additional fee in its group CI offering, while most of the high street banks do not even offer child cover, including Halifax which was, somewhat ironically, named parent-friendly bank of the year in 2004.
Happily, the reason why the benefit is effectively free is because claims for critically ill children are so rare. Since 1996, Scottish Provident has paid just 153 claims for children's benefit compared to 2,259 claims for adult claims. Similarly, Skandia has seen 62 children's payouts against 943 adult claims.
"To date we've had very few claims. Less than 3% of all our claims would be for children's critical illness," explains Peter Hamilton, head of protection marketing at Friends Provident. This estimate is echoed by almost all protection providers. Scottish Equitable reports that children's claims represent less than 5% of its payouts. Norwich Union receive just two or three claims a year, while Bright Grey has only seen three claims in two years. However, there is evidence to suggest that child CI claims are becoming more and more frequent.
In 2004, Scottish Provident announced that the number of child CI claims they had paid out had risen by 19% in the last months of 2003. In addition to this, last year, Scottish Equitable received 13 claims for children's illness, up significantly on the five seen in 2003. Sharp increases like this have led to concern that these rises may not be a one off and could be the start of a sustained climb in the number of claims seen annually.
"Although it is true that children's critical illness claims are now well established in the top ten of all critical illness claims, I think that rise is due simply to the popularity of critical illness policies in recent years," says Sue Wilkinson, head of health and life propositions at Abbey for Intermediaries. "If you look at the number of adult claims we now see, the number of child claims has increased in proportion with them."
Roger Edwards, products director at Bright Grey, agrees that the increases are natural: "As books grow older, the number of claims rise. For providers with a maturing book, they will of course see more claims as time has passed. For others with quite a young book they will not see increases like this," he adds. This assessment certainly explains why some providers have seen little evidence of an increase in children's CI claims compared to others.
While on the whole the offering by providers is the same across the board, there are some slight differences. Legal & General and Friends Provident will only pay out for a maximum of two and three child claims on a single CI policy respectively. While there are also variations in how long after birth a child becomes covered, normally 30 days, all providers cease child cover at the age of 18 with the exception of Scottish Equitable's group CI plan which covers any children in full-time education until they reach 21.
The main factor that really differentiates the offering from provider to provider however, is the maximum payout obtainable in the event of a claim. Although most providers will issue a maximum benefit in the region of £20,000-25,000, Norwich Union will only payout £10,000 per child claim. Other insurers with lower payouts have indicated that they are currently reviewing their maximum benefit. Scottish Widows has announced it is "currently reviewing the amount of children's critical illness that we offer," according to its marketing director for protection, Nick Kirwan.
Children's CI is administered under the same definitions as adult CI with pre-existing conditions excluded from cover. In addition to these however, congenital conditions such as spina bifida and hereditary conditions such as Huntingdon's Chorea and cystic fibrosis are also excluded.
A major difference between adult and child CI is the exclusion of a total and permanent disability (TPD) definition from child cover. Despite being a definition that has adult occupations in mind, it seems odd that if a child is disabled, never to recover, that they are not eligible to claim.
Restricting cover
"The central problem is that all the current definitions revolve around the ability to work. It would be very complicated to try and come up with a new definition for children," says Lawrence Jackson, head of risk products at Norwich Union.
Jackson's point is a valid one. How can you apply existing definitions of 'lack of independent existence' and 'activities of daily living' to children when a lack of an independent existence is entirely natural in a healthy one-year old? There has however, been at least one case in which a child claim was successfully made for TPD.
"We once had a case involving a little girl who contracted a rare disease that medical professionals have not conclusively labelled as congenital or not," reveals Alison Turner-Holmes, protection marketing manager at Skandia. "We decided to pay the claim under an activities of daily living definition." Although this is an individual case, some believe that work could be done to extend a different form of TPD cover to children.
"If we could come up with a definition of total permanent disability that avoided occupation and worked on a different basis, such as confinement to a hospital for more than 12 months, perhaps that would be something," suggests King. This seems unlikely to happen however, given the tiny number of cases involved.
The coverage offered by children's CI certainly appears attractive and is regarded by intermediaries as a highly valued sales tool. The recent rise in claims may have raised a few heads in the protection community but it appears that the product is relatively sound in its current form.
"There has been talk of the impact of childhood obesity on future child critical illness claims but really the health problems associated with obesity won't manifest themselves until the children of today are adults, so that really isn't a concern," says Steve Casey, project manager for individual protection at BUPA.
The old adage 'there's no news like bad news' seems somewhat appropriate in the case of children's CI. Intermediaries and providers endlessly discuss how to revive the fortunes of the income protection and life markets precisely because they are performing poorly. Children's CI on the other hand, appears to have escaped notice because both providers and advisers are happy with the cover as it is.
Current claim levels are tolerable for insurers, and for IFAs, as covering children for free is a great sales tool when proposing a CI policy to a prospective client. Customers will always appreciate the value of the benefit because, as Turner-Holmes points out: "Children are the core of every family."
COVER notes
• Children's CI is part and parcel of almost every CI policy on the market, both in the group and individual sector.
• All but one provider offers the benefit free with a CI policy.
• All providers cease child cover at the age of 18 with the exception of Scottish Equitable's group CI plan which covers any children in full-time education until they reach 21.
