Critical Illness Insurance Living Benefits Center

Flying Start (U. K.)

Published In Money Management (London), 10/95

Legend of British Assurance/Assurance Terms
PHI= Personal Health Insurance
IFA= Independent Financial Agent
TPD= Total Permanent Disability
CIC= Cricical Illness Cover
CI = Critical Illness
IPA= Indepentent Personal Advisor
ADL= Activities of Daily Living
IFAA=Independent Financial Agent Advisor
NFIFA= National Federation of Insurance Financial Advisors

CRITICAL ILLNESS COVERAGE (CIC) is on a roll!
It has outsold individual PHI in each of the last three years!
A survey conducted by Swiss Re and LIMRA found that
the number of new sales in 1994
increased by 9% over the previous year from 230,800 to 251,407!

Moreover, IFAs are making up for lost time, increasing the number of sales by 73.7% in 1994, from 34,318 in 1993 to 59,623. As a result, their market share jumped from 15% in 1993 to 24% in 1994. Mortgage related critical illness sales have been particularly successful. Employers Re estimates that 50-60% of mortgage related policies are being sold with CIC. However, sales of standalone CIC are rising fast, with an 11% increase between 1993 and 1994. Around 20% of policies sold in 1994 were on a standalone basis.

The growth in critical illness sales has been confined mainly to the individual market so far. The corporate market is largely untapped, although a few insurers have ventured into this area. Another area ripe for development is keyman cover, where some companies have come up with interesting new initiatives.

However, market penetration of CIC is only around 2.5%, reflecting the fact that it is a relative new product area, and indicating the potential for growth.

CRITICAL COVERAGE:
Much of the focus on critical illness is the number of illnesses covered. Market pressure to expand cover has been irresistible, and most companies in the IFA sector now have a minimum of 15 or 16, with the majority offering more than 20. Old Mutual scores the highest with 34, but it is unlikely that many offices will feel the need to emulate this. If anything, the tide has turned the other way, with concern being expressed about the difficulties that the proliferation of cover imposes on IFAs.

The fourth annual claims survey by Employers Re showed that 94% of all claims under critical illness policies are accounted for by just five conditions: heart attack, cancer, stroke, coronary artery disease surgery, and multiple sclerosis. Many of the additional diseases companies have felt impelled to add to their policies are covered under the total permanent disability (TPD) clause, enabling companies to offer them without becoming uncompetitive on price. In other words, a long list of diseases is to a large extent only window dressing rather than genuine added value.

Jim Adie of SMA Pegasus comments, "Customers are being confused by all the additions, which are not really giving them any extra protection."

Other companies say in their defence that the difference between an illness being specifically covered rather than relying on TPD to sweep it up is that, under the latter, you have to be unable to work to claim, which is not the case with the former. This effectively makes it accelerated TPD. This may not apply in every case though, as much depends on the definition of the illness

One approach to making the cover more flexible that is gaining ground is to split a plan into two tiers, with the first covering the core conditions and maybe a few others, while the second covers the less common claims. Some companies only offer an any-occupation definition for TPD on the basic tier, moving to own-occupation if the second tier is added.

Norwich Union, SMA Pegasus, Scottish Provident, and Zurich Life are among the companies that have adopted the tiered approach.

Roger Edwards of Scottish Provident suggests that the core conditions coverage should be considered in the same light as third party fire and theft motor insurance---something that everyone should have. The bells and whistles provided by the additional illness coverage is mainly a way of ensuring benefit is paid on diagnosis of, for example, multiple sclerosis, rather than having to wait until the condition deteriorates to the extent that a claim can be made under TPD.

Other companies have looked at the tiered approach but decided against. "We discounted it because the main cost is centered around the core conditions," says Phil Veale, product manager (protecton) at Axa Equity & Law. "Also, it creates complications in that it is yet another decision the customer has to make."

FLEXIBLE SUM ASSURED:
There is a general consensus of opinion that continuing to expand the number of diseases covered is not the best way forward for the critical illness market. Concentration should be focused instead on providing a product that really meets the needs of policyholders.

Several product initiatives come to mind here. The flexibility to split the sum assured on a plan between life cover and CIC is a very useful feature. One of the main criticisms of critical illness plans that combine the two elements is that where there is 100% acceleration of CIC, the policyholder is left with no life cover and little, if any, possibility of arranging any after diagnosis of a critical illness.

This may not matter if there is sufficient alternative cover in place, but it could leave dependents unprovided for if this is not the case.

Several companies allow the sum assured under an accelerated cover plan to be split according to the policyholder's needs so that, for example, only 60% of the benefit is paid out for a critical illness claim, leaving the other 40% in place as a death benefit. SMA Pegasus and Axa Equity & Law both offer this facility.

With Axa, the policyholder can choose any combination from 100% life cover to 100% CIC, and can vary the proportion or effect additional cover on events such as marriage, childbirth, and so on.

Sun Alliance has gone one further and separated the two sums assured completely. The company took this route because its research showed there was a need for CIC quite separate from death cover and that one should not compromise the other. On joint life cases, it is possible to have different sums assured for the critical illness element.

The problem of insurability may become a bigger issue as the number of claims increase. One posible solution cited by reinsurers is an approach widely adopted in Australia of a buy back option. Under this, payment of an extra premium at outset gives the right to buy back life cover 12 months after a claim has been made

Continuing cover is also a feature of some Australian CI plans, whereby a policy will pay out for cancer, for example, but cover continues for other conditions with an exclusion for cancer for three or four years.

Developments along these lines would certainly be valuable, although the downside is that they are likely to increase the cost of the product.

GUARANTEED RATES:
Rate guarantees are not really an issue in the critical illness market yet, as policies have not yet come up for their first 20 year review.

Furthermore, only one company, Swiss Life, has been prepared to stick its neck out and offer guaranteed rates. Rosalind Pearson of Swiss Life comments, "A lot of companies don't feel comfortable with guarantees because medical science is advancing pretty fast, and terms and conditions of policies are likely to change. But we wanted to be able to offer guaranteed rates to IPAs as it takes out the element of uncertainty."

Reinsurer M&G Re expects to see other companies offering guaranteed products when the market has settled down more. "There is a lot of talk about guarantees." says Jean Cassettari, critical illness specialist at M&G Re, "but CIC is still a fairly new product and prices could go either way. I think we will see others offering guarantees though, particularly where the underlying contract is guaranteed."

LONG TERM CARE RIDER:
Some companies, for example Sun Alliance, have effectively added a long term care element to their critical illness plans (where it can be continued beyond retirement age) by switching the definition from an occupational one to one based on activities of daily living (ADLs) at retirement.

A number of companies also include loss of independent existence among the conditions covered, which again acts as a kind of hybrid long term care cover where the plan can be continued beyond retirement. A claim is typically triggered under this cover on the failure of three or four ADLs, at which stage some degree of care is generally required.

Whilst not a major selling point, extras such as these do add value to a plan.

GROUP CIC:
The corporate market in critical illness is very much a fledgling one, but there are high hopes for its potential. Swiss Life, one of the major players and probably the market leader, reports significant growth this year, albeit from a low base. It expects to have around 100 schemes in its portfolio by the end of the year, compared with 58 at the start.

The cover under group schemes tends to be centered mainly on the core conditions as there is less need for the bells and whistles that feature on individual plans sold through the IFA channel; Swiss Life covers about nine illnesses.

The company also makes TPD optional on group schemes, and if it is selected, only offers it on an any-ococupation basis.

Ray Parrish of Swiss Life suggests that cover under these schemes could be limited to two times salary rather than the four times which is standard for life cover.

The group market undoubtedly offers opportunities to IFAs, as most schemes are likely to be sold through this channel. But it is difficult to guage the potential. Ray Parrish believes it will be a growing market, because it has expanded well on the individual side, and individuals like it and would therefore appreciate such a scheme as an employee benefit.

Nick Lomas of UNUM is more cautious. "I think that even in the individual market, it is an icing on the cake product. In the employee benefit market, companies are concentrating on products that provide a benefit to the employer as well as the employee. Critical illness is a nice to have rather than a need to have product in the group market. I think it will do very well, but purely as a benefit to reward senior executives." UNUM is unusual in being active in the group market without also offering an individual product.

KEYMAN USES:
Business protection is one area of sales on which IFAs have a bit of a monoply, requiring as it does familiarity with tax planning and trusts, and there is undoubtedly significant potential in this market for CIC. In common with the individual market, critical illness is complementary to PHI. The lump sum benefit could be used to buy out a partnership, for example, while the income protection benefit is needed to tide the business over in the event of ill health or an accident befalling a key director or partner.

Most companies offer their standard individual critical illness plans for the market, although a few have launched separate policies. Zurich Life, for example, launched keyman plans for PHI and CIC in June this year, and Scottish Provident also has a business version of its plan.

The Scottish Provident plan has taken out the children's cover and guaranteed insurability, and added additional inflation proofing. In all other respects it is the same as the personal version.

Several companies commented that they did not see the need for separate plans as there is little that needs to change. "It doesn't need a separate plan, just an own-ococupation definition," says Phil Veale of Axa Equity & Law.

However, Scottish Provident felt there was a lack of focus in targeting protection, and that although the benefit structure was similar, it would be helpful to IFAs in making presentations on a keyman basis to have a specific product to offer.

Sun Alliance has introduced a completely new pricing approach in the keyman market with its Progressive Protection plan, a term assurance plan with a critical illness rider. This provides continuous cover but on a single premium basis, so that each year's payment is at the rate applicable to that age. This product, which was launched in May, has recently been extended to the personal market as well.

EXPANDING MARKET:
Critical illness has got off to a good start, considering it was only introduced to the UK around 10 years ago. The IFA market has really only taken to it in the last two or three years, following the NFIFA (now IFAA) initiative of introducing standard definitions for the core conditions.

Like other healthcare areas, CIC is viewed as a product that offers great potential for IFAs once they are up to speed on its ins and outs and applications. They need more support from the providers in terms of training and ways of presenting the product to customers. Less concentration on the number of conditions covered, and more on real benefits such as a split sum assured, would also assist IFAs.

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