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Clear view for review

Critical-illness insurance: Helen Monks says the crucial point for reviewable critical-illness premiums is communication

Legal & General is beginning the first round of reviews for customers with its reviewable critical-illness insurance.

It will be dealing with 5,000 reviews in the first six months of the process, which happens at five-year intervals, and the firm says that more than 90 per cent of clients will see no change or a reduction in the cost of their premiums.

Reviewable products were introduced in 2003 by firms such as L&G and Norwich Union, offering clients more affordable critical-illness protection where a guaranteed premium would have proved too expensive.

Legal & General product marketing director Bonnie Burns says: “The market is incredibly competitive and the gap between guaranteed and reviewable premiums has narrowed but, for anyone on a tight budget, the reviewable premium represents a cost-effective solution.”

Highclere Financial Services partner Alan Lakey says: “The difference between reviewable and non-reviewable premiums is probably around 10-15 per cent for individuals under 40 and as much as 50 per cent for people over 40.”

But this is not to say that Lakey has sold many reviewable CI products. He says: “I will only recommend them if the client is the kind of person who wants to take a chance or if a non-reviewable policy is seriously more expensive than a reviewable one.”

Brokers are concerned by the future trend of reviewable premiums at L&G, questioning whether reductions can be sustainable in future.

Penny O’Nions of The Onion Group says: “I cannot believe falling prices can be sustainable. It may happen for this first review but unless the policies were priced wrongly to start with, this will not happen at the next review. If it does turn out to be the case, then you could be in danger of clients with falling premiums feeling that they have been overpaying for cover all those years.”

Lakey also feels that the only directions for premiums must be up, especially as the age of customers on reviewable contracts obviously increases.

But L&G’s Burns says that the age of clients is not the key factor. She says: “Age does not really come into it. What we do is look at industry claims’ experience, what were the assumptions when we set prices then and what are the assumptions now. For example, whether we expect a major new illness to sweep the nation or whether there have been any relevant medical advances when setting premiums now.”

She says that where renewal premiums are less than 5 per cent more than five years ago, L&G will not enforce the rise, leaving the premium frozen.

She adds that where the cost of premiums rises, it will not be the case that clients could get a better deal by shopping around. It will be because, for whatever medical reason, they are perceived to be an increased risk and their reviewed cover priced accordingly.

L&G says in terms of sales, the split between reviewable and non-reviewable policies is roughly 50/50 while of LV= says sales of non-reviewable policies account for around 25-27 per cent of CI sales.

LV= head of pricing Chris McFarlane expects the popularity of reviewable policies to continue, saying: “Reviewable policies have always been popular. There is always an affordability issue for some individuals, especially larger cases.”

NU recently introduced a range of measures designed to tackle non-disclosure, including a pilot scheme which ran throughout July where 5,000 existing protection policyholders were asked to review their original application forms and supply any medical information they may have missed at the outset of their application.

At the start of October, NU announced an 11 per cent increase in critical illness payments since 2005. According to the insurer’s latest critical-illness insurance claims report, 80 per cent of CI claims in 2006 were paid, followed by 86 per cent during January to June 2007. This compares with 75 per cent of claims paid in 2005.

As CI policies evolve, advisers can arguably expect to see more review and greater disclosure opportunities built into contracts.

The important thing for advisers both now and in the future is to ensure that clients know exactly what type of contract they are buying into.

“The role of the adviser is key here; these are complex products requiring quality advice,” says McFarlane.

For advisers with clients who are interested in reviewable CI or who are expected to receive a review of their current policy in the coming months, brokers say the secret to best practice that leaves neither adviser nor client vulnerable to inappropriate levels of cover or complaints, lies in communication between the two parties.

Lakey says: “Doubtless, some clients will complain if their premiums go up, some having forgotten that they agreed to reviewable cover and before you know it you could have the ombudsman involved.

“The secret is to document everything at the outset in clear terms.”

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