In the 2015 Critical Illness stakes – Should the Race for the Line be Driven by the Number of Illnesses Covered?
A BRIEF HISTORY...
Critical Illness Insurance has been with us now as a Financial Services Product for around 30 years. For those who don’t know the full story it was Doctor Marius Barnard who was credited with the invention in South Africa in 1985. In pretty much stating the obvious, he said that for almost all of his patients, a catastrophic health event such as diagnosis of cancer, heart attack or stroke was a life transforming event, leading, in the vast majority of cases, to personal financial ruin due to truncation of productive working lifetimes and uncompleted asset accumulation.
The Doctor felt strongly that insurance companies should help to address the problem and soon, South African insurance companies quickly saw the potential market associated with Barnard’s idea. In devising products to fill Barnard’s “void,” insurers realised that every policyholder’s financial needs after diagnosis would be unique: one policyholder would have an unpaid mortgage, another would have children to send to college, a third would have insufficient savings to support dependents when earning powers are diminished. So began the clamour of product providers to devise such products worldwide.
In the early days of development, products were quite simplistic in their approach … Cancer was cancer….. Full Stop. A heart attack was a heart attack….Full Stop. In the event of a diagnosis, claims were paid mainly without question.
As Critical Illness propositions developed, more and more illnesses began to be covered with providers promoting the numbers of illnesses as a key part of their marketing strategies. At the same time some definitions became somewhat clouded and caused some intermediaries concern about what was, and was not, covered - especially outside of the core illnesses. Under the auspices of the Association of British Insurers (ABI) thankfully a standardised set of definitions was born, so as not to confuse clients too much as to what they were buying and the likelihood of a payment being made ………Brief History lesson over!
WHERE WE ARE TODAY
Moving on to today (+30 years) … Is the industry in better or worse shape with regards to helping intermediaries decide which are the most appropriate products to sell? And if it is not in better shape, is that a barrier for intermediaries in making sales of a product that clearly has some value for clients? Other than the fact that medical science has moved on and in some instances patients are back to work faster than 30 years ago, Dr Barnard’s principles and protestations remain the same: a severe illness would render most households crippled by either earner (or both) being unable to work. Even those with assets accumulated may today see retirement pots being severely dented in those circumstances by drawing down funds, potentially in a non tax efficient way.
Yet, numbers of product sales of Standalone CI or Life Assurance with CI (Term Rider Products) have declined significantly since 2000. So could confusion over definitions be a factor? Is it that intermediaries don’t speak to clients on CI? Or is price still the overriding issue?
According to the British Journal of Cancer 1 in 2 will now contract cancer in their lifetime – not great odds in dodging the disease. Thanks to research, the UK’s survival rates have doubled over the last 40 years and around half of patients now survive the disease for more than 10 years. But, as more people benefit from improved healthcare and longer life expectancy, the number of cancer cases is expected to rise. So, as an adviser, what are you expected to do to ensure that when your client gets diagnosed with cancer that any policy you have sold will pay out? It appears to be true that the “conditions race” is still upon us, however, more recently this appears to have been for the better. Many insurers are concentrating less on the number of illnesses covered and improving the depth of cover offered and, in some instances, offering partial payments.
PROVIDER SUPPORT FOR INTERMEDIARIES
VitalityLife believe that adding new conditions is not a bad thing, and whilst it can become an issue when arbitrary requirements and restrictions are put in place that make the chance of a claim being made so low (such as putting an age restriction on diabetes or insisting on certain treatments before claims are paid), they still say that advisers have long been sophisticated enough to see past a simple numbers game in terms of recognising a product’s value. They believe that most compare on the basis of the breadth of cover combined with the likelihood of a payout.
VitalityLife’s Serious Illness Cover, for example, covers clients for more conditions than any other provider on the market. Beyond these numbers however is their severity based approach. This, coupled with breadth of cover, means they say that VitalityLife clients are up to twice as likely to receive a payout from them as any other provider.
Even looking at Stroke as opposed to Cancer, they state that with traditional Critical Illness Cover, strokes need to be of a certain severity to be eligible for a payout. If a client does get one, they’d be unable to get cover again due to their medical history. Unfortunately, 30% of stroke survivors will go on to have a recurrent stroke or Transient Ischaemic Attack (TIA, or mini-stroke). If these people had a Critical Illness Cover policy, they’d be unable to protect against this financially. Vitality Serious Illness Cover is different. Due to the severity based approach, where they pay out based on how severe the condition is, clients will get a payout to match the severity of their stroke. So if they suffer a stroke of a lower severity and are able to return to work, they’d receive a lower payout, but still have cover in place to protect them in the future.
They also point out that it’s not only Serious Illness Cover that can protect against the financial implications of having a stroke. Their LifestyleCare Cover allows clients early access to their Whole of Life Cover if they are no longer able to look after themselves. So if a client has a stroke and is left needing to pay for care or alterations to their home, they’ll be able to access the funds to help pay for these.
In the past few weeks we have seen changes that seem to bear out this product simplification argument; making things clearer for customers is becoming a greater part of what all providers do, and continue to strive towards, going forward.
Zurich have recently made improvements to coverage of key conditions, as well as adding to the illnesses that they cover. The key enhancements include adding the two most common forms of skin cancer to definitions, as well as the most common form of adult leukaemia. They have halved the period of time when clinical symptoms must persist for MS to 3 months, or removed the time altogether with MRI evidence. On heart attacks Zurich has removed the threshold for elevated troponin levels, meaning that any diagnosed heart attack showing a raised level of troponins will be payable. These are clearly changes positively affecting the likelihood of a claim to be paid out in the 'core' illness sector, and not adding numbers with a little or no realistic chance of payout.
As mentioned previously the ABI have played a major part in driving industry standards higher in relation to definitions and further changes will be coming in to force via their statement of best practice for CI insurance coming into force in December 2015. The ABI is seeking to improve clarity for customers by setting out an updated model wording of illnesses.
Zurich say eight conditions have been enhanced to exceed the ABI's definitions making them ABI+. In total, Zurich now offers eighteen ABI+ conditions, including the top four reasons for claims – stroke, cancer, heart attack and multiple sclerosis – which accounted for 84% of pay-outs in 2014. In keeping with other providers looking at partial payments, they have added further enhancements, including doubling the number of conditions that customers can claim additional payments on from 6 to 12. These payments mean that eligible customers diagnosed with less advanced critical illnesses covered by the product will benefit from a pay-out of 20% of their sum assured or £15k, whichever is lower. In line with the ABI’s best practice, Zurich has clarified that successful additional claims will not reduce the amount of benefit remaining. They say that the recent changes will strengthen the coverage available on their CI product.
They have also concentrated on improving the definitions for the conditions customers are most likely to claim on and have made them clearer. This should help customers better understand what they are buying, and make things as straightforward as possible when they need to claim.
FURTHER PRACTICAL HELP COMES FROM L&G AND BRIGHT GREY
Legal & General saw that nearly 90% of their CI claims in 2013 were from customers who had suffered from cancer, heart attack, stroke or MS. As a result they have extended the cover provided for these 4 conditions.
In addition they have produced some consumer friendly charts to show the conditions that are covered under the L&G plans. The ANATOME tool is designed to give some basic medical information to clients at point of sale and is a quality educational reference point for intermediaries wanting to look at specific areas covered.
They effectively give consumers an idea of the depth of coverage of the plan broken down in to ten specific areas. You can explore the ANATOME tool here.
Bright Grey also are very much in agreement of the basis of this newsletter in that they believe for a number of years the critical illness market has not necessarily been developing in the best interests of the customer. In their view the product has drifted away from its original intention of providing cover for critical events with the seemingly never-ending proliferation of conditions. This has led to product developments based on a “tick-box” mentality, rather than by analysis of what would really benefit the customer. They believe this is an issue which has stunted the growth of the protection market.
Their answer is to see a greater focus on customer needs, with simpler definitions and cover where it actually counts. Having a critical illness usually forces a change in lifestyle. But a critical illness payout should help a customer to carry on living their life - in their home, with their family, with the best treatment available. That, along with added-value services provided by some insurers can provide the practical and emotional support at a time when they’ll need that too. Longer term they predict that providers will take a step back and re-evaluate what it is they’re trying to do for customers. Added-value services are likely to feature more prominently as providers try to differentiate themselves by offering practical and emotional support as well as financial help to their customers.
They believe that all intermediaries must look at what they value for their clients. Is it having a full and exhaustive list of illnesses covered? Is it the quality or simplicity of the definitions for the top reasons for claim? Is it added-value services?
That almost brings us back to square one in truth. Any intermediary decision will be based on a number of factors before making a decision to recommend a product to a client – however with providers significantly raising the game in terms of definitions and looking to find reasons to pay out, we can clearly see a shift in attitudes that will help intermediaries to at least offer clients the opportunity to look at CI as an option. Bright Grey have produced some excellent client facing material for intermediaries to highlight and personalise the issues and opportunities.
Whether to simply cover a shortfall in income where capital may be required OR to bolster a Pension fund at a critical time in a client's life, CI is a product that deserves significant consideration. You can create personal CI reports for clients here.
There is no doubt that the ABI support is having positive impacts in driving standards, but with only 600,000 policies sold in 2013 and a 50% chance of UK adults with a chance of contracting a CI, there is more work to be done in working with intermediaries to promote the products. With providers moving to partial payments and effectively trying to pay claims for all situations but non-disclosure, we seem to be in a better place…Dr Barnard should be proud of his efforts!
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