No quick fix

The critical illness market has lost face with consumers recently, after a spate of negative media publicity highlighting repudiated claims. Jason King says the industry must get back to basics and consider the type of packages consumers really want

Critical illness cover has hit the headlines during the past nine months, in both the trade and national press. It would appear to have become a victim of its own success and needs to be re-examined by providers if it is to maintain its popularity in the long term.

CI cover was first introduced during the 1980s and has been largely sold as a bolt-on option to a term life insurance contract. As the product gained popularity with providers, there followed a decade of 'land grab', where providers attempted to outdo each other on the number of CI definitions their policies covered. As sales of CI soared, so the marketing departments went into overdrive promoting policies with more than 30 definitions.

However, with extra definitions comes extra small print, detailing the exclusions. As a result, CI has become an increasingly difficult product to understand fully and underwrite precisely - let alone claim under.

Providers have lost sight of the original purpose of CI, which was to pay out a lump sum in the event that the policyholder's independence or ability to work for a living was severely and permanently affected following a non-fatal accident, injury or illness.

Claims denial

And so we have arrived at the current and publicly-criticised situation where many claims are declined either because the conditions in the small print have not been met or because of innocent non-disclosure of a seemingly minor visit to the doctors many years previously.

Conversely, other policyholders, aided by improved detection techniques, have benefited from windfall payments. These techniques have enabled them to meet the criteria for a valid claim even though neither their independence nor their ability to work has been severely and permanently affected.

The industry's counter-argument to criticism has been that policyholders have the comfort of guaranteed CI definitions, as well as guaranteed premiums, whereas providers have had to shoulder the burden of advances in medical detection and treatment. But surely when CI was originally priced, providers should have factored in the inevitable improvements in medical science.

Providers have let consumers down and now consumers are paying the price through drastic changes to the pricing and structure of this product.

Contracts with reviewable premiums have taken the limelight recently, meaning that if providers suffer a bad claims experience they are able to increase their clients' premiums to cover the shortfall. However, there is little industry coherence on the definition of reviewable. Some providers' premiums are reviewable only upwards (Legal & General), others allow premiums to fall as well - however unlikely this may be. Some providers are allowed to review their premiums at only three months' notice (Direct Line), while others are only reviewable every five years (Norwich Union).

Furthermore, there is much speculation about the next great leap - the move to reviewable definitions. To date, no major provider has taken this step but the fear is that it will only take one major provider to break ranks and the rest will follow.

However, consumers are not ready for reviewable definitions and clients will not like clumsy offerings - it is too unpredictable.

So what lies ahead for CI? Firstly, providers and industry bodies must spend more time consulting with advisers and consumers to gauge their wants and needs, and then design products to match those needs, as opposed to dictating to consumers what they can have.

Creative thinking

There are many options available and some creative thinking is called for. Reverting CI definitions back to core illnesses with a total permanent disability override to eliminate windfall claims should be considered.

As should splitting CI into two products: a TPD-only benefit as an optional extra onto a term assurance contract, which would provide a guaranteed definition as well as a guaranteed premium; and then, for those clients who want a more comprehensive plan with CI definitions covering specific illnesses, this could be offered with a reviewable premium.

Alternatively, providers could split the benefit into two elements. For example, 10% of the sum assured on diagnosis of one of the specified illnesses with a 100% payout only being achieved if the TPD definition is met. Finally, two further options to consider include tiered definitions, with consumers choosing their preferred level of cover and some form of CI/income protection plan offering.

Protection advice

Advisers also need to reconsider the merits of permanent health insurance as a key element of protection advice. During recent years, the sales of PHI have suffered at the hands of CI as consumers have been more attracted by high lump sum benefits, and advisers have been attracted by simpler quotation systems and underwriting procedures. But advisers should remember the basic principle of PHI to replace lost income and, if affordable, a lump sum from CI to pay off debts and provide for the capital costs of any forced changes in lifestyle.

Finally, it must be remembered that the popularity of CI cover to date has been due to its fixed price, relative cheapness and the ease with which clients have been able to compare the costs and benefits between different providers - without being forced to seek professional advice.

This must be maintained if CI is to maintain its profile and extend its popularity.

- Jason King is director of Life Policies Direct.

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