Joe Caunce, Business Development Manager Scottish Widows
The Value of a Single Product Approach
The impact of the pandemic is still unravelling, but it's reassuring to see individual protection volumes bouncing back from the pandemic slump with a greater awareness of both mortality and morbidity risk at a time where safeguarding financial resilience is more important than ever. The Swiss Re Term & Health Watch 2022 identified that the number of critical illness policies arranged in 2021 was up 11.5% from the previous year, with 581,658 sales in the market[1]. With the FCA's guidance on Consumer Duty on the horizon it is crucial for providers to consider how we support in meeting the increasing desire for critical illness cover.
Critical illness insurance products are in their nature complex contracts and the role of the intermediary is to evaluate the market and recommend the most appropriate product to deliver the best value for their client based on their budget. However the protection advice process is thwarted by the high volume of critical illness products in the market, with the majority of providers offering numerous versions of the same product. Third party critical illness review tools can support intermediaries' protection advice process although it can be difficult to overlay this research with the variation in premium prices to establish best value for customers.
This has been a key topic for the FCA as part of the wider work Consumer Duty consultation. The FCA issued PS21/5: General Insurance pricing practices in August 2021, focusing on the design and distribution of protection contracts. ‘Manufacturers' (insurers) are already required to consider whether their products offer fair value to customers and ‘distributors' (intermediaries) are challenged to "obtain all necessary information to consider product value". How many more claims are paid out as a result of the increased premium paid for a ‘premium' or ‘enhanced' critical illness product - and how easy is it for an intermediary to obtain this necessary information? Similarly, when justifying the selection of one of several iterations that a critical illness insurer offers, can intermediaries be sure that the annual claims statistics publicised by the provider relate to that specific product?
We know that a handful of conditions make up the majority of claims, primarily across cancer and cardiological diagnoses. The ABI Guide to Minimum Standards stipulates that critical illness insurance policies must include cover for cancer, heart attack and stroke according to specified minimum definitions. In addition, and in order to support consumers and intermediaries in understanding critical illness polices, the ABI provide minimum definitions for a further 19 conditions. The ABI's definition for cancer, excluding less advanced cases, is "any malignant tumour positively diagnosed with histological confirmation and characterised by the uncontrolled growth of malignant cells and invasion of tissue". It is important to be aware that all contracts must meet this definition considering cancer contributed to 29.6% of Scottish Widows life claims and 63.8% of critical illness claims in 2021. It continues to be the main reason for claim and risk to financial resilience considering more than four in five people living with cancer are being hit by a ‘cancer price tag' that can be up to £891 a month[2].
Yet, although critical illness policies must comply with the ABI's minimum standards, we continue to see the growing range in products available in the market. Year on year the main diagnoses for critical illness claims do not change - and the reality is 95% of claims fall within the top 10 definitions, with the bulk accrued under cancer, heart attack, stroke and MS definitions. These are the moments of truth; the risks that customers seek to protect themselves and their long term financial plans and liabilities against. When comparing the variances between the volume of potential critical illness pay-out conditions offered, ranging from 10s-100s from provider to provider, there is no correlation between an increased number of conditions and a higher % of claims paid considering the annual claims statistics disclosed by insurers. To put this into perspective, Scottish Widows Protect paid out 93% of critical illness claims in 2021, across 30 primary and 10 additional conditions.
Considering Principle 12 of Consumer Duty instructs intermediaries to "act to deliver good outcomes to retail customers" across four outcomes; products and services, price and value, consumer understanding and consumers support it is important for manufacturers to reflect on how they are supporting advisers to do so. We should be making it simpler for intermediaries to recommend products that meet their target market's needs. In offering a simplified approach with one comprehensive critical illness product focussed on the quality of definitions where the most claims are paid, we can encourage advisers to engage with the protection market with a product that's simpler for the adviser to recommend and most importantly the consumer to understand and utilise when they need it the most.
This post is funded by Scottish Widows
