Critical illness sales are doing well. But Ian Jefferies outlines concerns over the product's development and offers a partial solution.
Despite much gloom and doom in the industry in recent years about protection sales flat-lining, critical illness (CI) is an area that has bucked the trend. Sales of CI through directly-authorised advisers have been on the increase, with almost 330,000 policy sales in 2012 compared with less than 250,000 in 2008.
We should not lose sight of the significant value that they have delivered to clients. Data from the Association of British Insurers shows that in 2012, more than 11,700 CI plans paid out a total of £820m in claims at a payment rate of 91%.
These are impressive statistics, but it is worth questioning whether all aspects of CI development are in the right direction. A key trend in the second half of 2013 in particular has been for providers to upgrade their cover by adding further medical conditions to their products.
As a result, many products at the quality end of the CI market now cover more than 50 illnesses. While this may be a well-intentioned move to make cover more comprehensive, it also adds to the complexity of the market.
Arguably, it is the quality of cover that matters and not necessarily the number of conditions specified - particularly as 70% of all CI claims are for just the three major conditions: cancer, heart attack and strokes.
In fact, in a recent survey of financial advisers, 46% of respondents said that quality is the most important factor when recommending a CI policy to a client. This is in comparison to 19% of respondents who suggested that the number of conditions covered was paramount.
With the worrying focus on the conditions race, it is unsurprising that there is a risk that the ‘real world' experiences of customers accessing protection will be overlooked. This is where the true quality of cover is tested.
After-claim cover
One particular area of CI policies that seems to be suffering from this is after-claim cover. At Skandia, a typical CI claimant is in their late 40s or early 50s. Is enough consideration given to what customers such as these can do once they have suffered a serious medical condition, made a claim, received a payout and then recovered?
In normal circumstances, it will be very costly or even impossible for these customers to set up new cover to protect against a recurrence or another medical condition. Furthermore, with enhancements in medical science, the survival rates for many of the common conditions are significantly increasing.
Research from Macmillan Cancer Support shows that people now live on average six times longer after a cancer diagnosis than 40 years ago, and according to the Stroke Association there are more than 1.1 million stroke survivors living in the UK with a 1 in 3 chance of a stroke recurring within ten years.
US research indicates that heart attacks are likely to reoccur in 1 in 4 cases. This is where ‘buy-back' or ‘cover reinstatement' really delivers for clients. By adding this option to a CI policy, it gives the guaranteed right to set up further cover following a claim.
Premiums will not be increased because of the deterioration in the client's state of health and the rate they pay will be based on premium rates at that time.
On high-quality policies, after-claim cover is available for many of the major conditions and, crucially, the original illness claimed on will not be excluded.
So for example, a second heart attack would be covered by the policy. After-claim cover can also be added to life plans which cover total permanent disability.
Given the high value this element of CI cover can add to a client, and the increasing probability of recovery from an illness, the costs can be very reasonable.For example, a 43-year-old non-smoker looking for £150,000 of CI cover over 20 years can expect to pay roughly £8 per month extra to include the reinstatement option within his plan. This works out as roughly an 8% addition to the base premium.
Despite the benefits after-claim cover can add, there are few providers in the market that offer the option. Arguably, the market has become too distracted by the need to add new conditions to CI plans and some of the fundamental elements that address customer needs are being left behind.
Cover that leads on quality and maximises the likelihood of clients being able to make successful claims, whenever they need to, will lead the way and ultimately prove most successful.
Ian Jefferies is head of protection at Skandia
