Critical Illness Insurance Living Benefits Center

A Critical Success in U.K.

A CRITICAL SUCCESS "On The Risk" vol.12 n3(1996)

By Roger Jones, FCII, APMI
UK Admistration Manager
Employers Reassurance International
London, England

Legend of British Assurance/Assurance Terms
DSF= Developed Sales Force
IFA= Independent Financial Advisor
TA = Tied Agent (equivalent of Captive Agent)

The U.K. life assurance industry is having rather a difficult time of it at the moment. The slump in the residential property market has had a knock-on effect to endowment assurance sales, which are commonly used for collateral security. The sale of personal pensions plans, another big source of business in the late '80s has now come under scrutiny by the industry's regulators as, indeed, have life assurance selling techniques generally. The result has been that a significant number of life assurance companies have been struggling to generate any significant volumes of new business.

It therefore makes it even more heartening to be able to identify at least one successful product development idea which is really starting to take off. That product is critical illness.

Critical illness protection is an insurance policy that pays out a sum assured on the diagnosis of a specified illness such as a stroke, cancer, heart attack or permanent total disablement.

Plans come in many forms. The most common arrangement is for it to be written as a whole life policy where payment of the critical illness is effectively an acceleration of the death benefit. It is also being added as a rider to endowment policies, particularly when they are used as collateral security for house purchase, as well as to other life assurance plans. It is also possible to have a stand-alone policy covering a person for a specific period with no associated death benefit.

The money from a successful claim may be used for any purpose, such as modifying a house, employing care-givers, buying medical equipment or even for taking a holiday.

The concept of the plan was originally developed in South Africa and was introduced to the U.K. in its current format in the late 1980s.

The first company to begin selling this business in large volumes was Abbey Life who launched their Living Assurance Plan in 1987. Their main sales outlet is through their direct sales force although some business is placed with them by independent financial advisers; that is to say, intermediaries who are not tied to any particular insurance company

At once stage Abbey Life estimated that Living Assurance accounted for 10% of its new business production and it is still one of the leading sellers of this business in the U.K.

However, other companies soon followed and there are now between 60 and 70 life insurers offering this product in one form or another in the U.K. market.

As the market has grown, so have the number of diseases which insurers are prepared to cover under their contract. To begin with, policies normally covered the so called core diseases of heart attack, cancer, stroke, renal failure, major organ transplant, and coronary artery disease surgery. Virtually all policies also contained a permanent and total disability cover to sweep up any major disabling diseases not already covered.

Since then, the list of diseases has been extended substantially. At the last count the most diseases offered in a contract was 32! The more common diseases to have been added are multiple sclerosis, paralysis, terminal illness, and loss of sight.

A number of these are, in reality, fairly cosmetic because they would normally have been covered under the PTD provision anyway and, as such, do not increase the cost of the policy. Others, such as multiple sclerosis, do increase the incidence of claims and therefore the cost.

As has already been mentioned, Abbey Life sells most of this business through its direct sales force and this pattern has been repeated with other companies. A recent survey carried out by Employers Reassurance International shows that 68% of new business production in 1994 was through direct sales forces or agencies tied to particular insurance companies.

Nevertheless, sales of this contract through independent financial advisers has continued to grow. In 1991 IFAs accounted for less than 15% of new policies sold, butthis has increased steadily such that their share has more than doubled to 32% in 1994.

Regulatory legislation in the U.K. requires independent financial advisers to provide the best advice to their clients and IFAs have been rather wary of the new product in trying to determine which policy did actually provide best value for money. Not only does the different ranges of diseases make analysis difficult but also companies have different definitions of what constitutes a claim within each disease. Some standardizations of definition of the core diseases has now been agreed and IFAs are now feeling more confident about being able to recommend specific products to their clients. Although the increase in sales has been quite dramatic, it has also been very patchy between companies. All companies in the top ten now have over 10,000 policies in force, but the vast majority of companies still only have between 1,000 and 5,000 policies on their books.

Inevitably, with such a new product, the pricing and underwriting need to be reviewed and refined to ensure continued profitability. Our 1994 annual survey revealed some interesting trends. The survey shows that over 2,600 critical illness claims had been notified as at 31 December 1994. During 1994 itself, 965 of these claims were notified and this was a 30% increase on the 1993 figure. In addition to the above figures, a further 775 PTD claims under critical illness plans had been notified in total up to the end of the year.

Of the critical illness claims notified, 1,941 had been paid as at the end of 1994 generating claim payments in excess of £58m.

With nearly 60% of in-force policies being concentrated amongst the top five insurers, it is perhaps no surprise that nearly 80% of claims notified have come from these same five companies. As a result, many of the offices currently offering critical illness contracts have only paid a handful of claims or have yet to pay a claim at all.

When looking at the incidence of critical illness claims by disease, a fairly stable pattern has emerged over the last few years. The graph below shows that to the end of 1994 the major three conditions of cancer, heart attack and stroke have accounted for 85% of all claims notified.

Claims for multiple sclerosis account for 5% of the total number notified. It is surprising that such a relatively large number of claims has arisen from this cause, which seems out of proportion to the incidence of the disease in the general population. MS is a relatively new addition to the critical illness products of many insurers and therefore it is too early to comment on trends. Nevertheless, insurers will be monitoring experience closely in this area.

While there appears to be an ever-increasing list of conditions covered under critical illness policies, very few claims have actually arisen for diseases other than those already mentioned. This is partly because of the relatively recent introduction of some of these conditions but also certainly reflects the small risks associated with this additional cover. When looking at the actual claimns paid (as opposed to notified), 1,102 have been in respect of cancer, 475 for heart attack, and 164 for stroke. As with notified claims, the next two major conditions for claims paid are coronary artery disease surgery and multiple sclerosis.

Critical illness claims have a high declinature rate compared to other life assurance contracts. The trend here is also reasonably stable over recent years with approximately 20% of claims notified being declined.

Nearly 50% of declined claims have been due to misdiagnosis of a condition or failure to meet the policy definitions whilst nondisclosure has accounted for just over 32%. Perhaps not surprisingly, the declinature rates for claims for the various conditions do vary and this will often be a function of the complexity of the condition, misunderstandings or policy definitions, occurrence of diseases that are specifically excluded, etc. Examples of this would be cancer claims denied where the growth is benign ("in situ"), chest pains or angina which do not satisfy the heart attack criteria in the policy, and stroke claims that are actually "transient ischemic attacks" and are hence temporary in nature with no residual symptoms.

Turning to PTD claims, the position is far worse with 63% of claims have been declined. The biggest single reason for declining claims in this category is the failure to satisfy the definition of disability rather than any material PTD nondisclosure by the policyholder. The key words under the PTD definition are "total and permanent" and a number of claims clearly do not satisfy this definition.

When analyzing claims by looking at the duration of time between inception of the policy and notification of the claim, the figures are quite surprising. Approximately 13% of all claims have been notified within the first three months of the policy and over 25% within the first six months.

Clearly, given the relative immaturity of the critical illness portfolio, the percentage of early claims as a proportion of the total is likely to be relatively high. Nevertheless, the number of early claims is higher than originally anticipated and reinforces the point that critical illness has a significant antiselection element. For example, in circumstances where nondisclosure has not been evident, it nevertheless suggests some form of "sixth snese", whereby applicants are anticipating a serious condition without having consulted their regular medical attendant. Having said this, there are undoubtedly some cases where an individual would have consulted someone other than his usual doctor and as a result this consultation would not appear in the medical records and would not be picked up at claims stage. This is particularly true of claimants who are doctors themselves and are either providing themselves with treatment, or consulting a colleague.

While the average sum assured for new critical illness policies is approximately £50,000, the average critical illness claim is closer to £30,000. An analysis of critical illness claims by sum assured have been very few claims in excess of £150,000.

Looking at the age of claimants, the highest number of male claims has been paid for the age category 41-50 with a significant number also being paid for those under 40. However, the picture is slightly different for females with the highest number of claims in the under 40 category and, although the survey does not analyze the cause of claims by age and sex, our own experience would suggest that breast cancer would be a significat cause of claim for young females.

Critical illness is clearly a product that is here to stay and should prove to be one of the real success stories in an increasingly difficult market. It has filled a gap in the range of life and health products and there is a growing awareness of the value of the cover provided, both by sales forces and financial advisors. Certain problems need to be overcome, particularly the rate of declinature of claims, arising in most cases from a misunderstanding of the policy terms. The market has attempted to improve this by standardizing some of the definitions and drawing up "plain English" terms. As the market grows and a better understanding of the product develops, this particular problem should reduce considerably.

NOTE: Figures are derived from Employers Reassurance International's Critical Illness Claims Survey. About the Author

Roger Jones, FCII, APMI, joined Employers Reassurance International 19 years ago (when it was Victory Insurance) and has been involved in all aspects of reinsurance administration from reinsurance treaty wordings through to claims. Prior to joining ERI Life, he worked at Sun Life Assurance Society, a major U.K. pensions office and then at Welfare Life (now part of London and Manchester) dealing with unit linked life contracts. Roger manages the U.K. Life Administration Department and has been involved in critical illness claims virtually since the product was first launched in the U.K. and has been responsible for producing the critical illness claims market survey which ERI Life has been publishing since 1992.

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