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Critical list

The critical sector is still in a state of flux but eventually it must move to cover only core illnesses and simplify the processes.

A lot has been said about the future of the critical-illness cover market, especially in the wake of the recent ABI working party workshop on CI.

What direction is the CI market heading in? That is the question being considered by providers and distributors.

First of all, given all this talk of change, surely the CI market must be in decline? Well, while the overall protection market was down last year compared with 2003, this cannot be attributed to the CI sector. In fact, the CI market has stabilised recently after a period of volatility and this is borne out by the increasing number of providers which are offering guaranteed CI rates and reviewable rates.

There is further support from new entrants to the market which have continued to offer CI as we know it as a core part of their offering.

Finally, it appears more likely that the CI working party will favour tightening the definitions rather than opting for more radical change so the CI market is looking in reasonable condition.

However, two key issues highlight change as inevitable. First, advances in medical diagnostic techniques are accelerating detection of some of the core illnesses, especially cancers. This will have a positive effect on future morbidity and life expectancy but will significantly increase the probability of claims and the cost of the current CI product.

An increasingly expensive product does not feel like the answer to the protection needs of the mass market.

Second, the increasing rate of claims being declined and subsequent referral to the Financial Ombudsman Service means, among other things, that customers are clearly not understanding what they are buying. “Tell and sell” does not appear to be a viable long-term option, especially in light of the FSA’s treating customers fairly programme.

There is also the increasing trend towards non-advice buys as consumers seek the cheapest cover available. They are unlikely to consider fully the level of cover available.

What needs to be done? By looking at how to address these two issues, the future direction of the CI market should bec-ome clearer. First, how can we reduce the probability of claims to an acceptable and affordable level while still providing cover of real value to customers?

Going back to basics and providing protection only against critical illnesses which will have a materially negative effect on a life would appear to be the most sensible answer, covering only core illnesses and conditions to reduce so-called windfall payments.

This would be achieved by introducing a degree of severity testing to the problem conditions. Such testing could range from just limiting certain covers, for example, only protect “lifethreatening” cancers to full severity test on all claims such as ability to work due to condition.

Additional cover could still be offered at extra cost in a tiered fashion. This approach could be more attractive than a one-size-fits-all product, giving advisers and customers choice.

Second, how can we ensure that we are treating customers fairly? Well, one way would be to promote income protection far more than at present as this could be argued to be the primary protection need ahead of critical illness.

However, trying to increase sales of income protection has always proved to be a problem and must be viewed as a longer-term solution, if at all.

Ensuring that customers know what cover they are buying through clear and simple definitions must be the answer. The introduction of two or more tiers of cover could confuse more than clarify but by showing what is not covered in the core definitions, that is, everything in the other tiers, customer understanding can only be improved and, combined with good-quality advice, this should bring us more into line with TCF.

How soon will it be before we see new products onthe market? Most providers and reinsurers have been working on a next generation of CI for some time and the introduction of some form of severity testing does seem to be the most attractive option on the table at present.

However, given that the protection market is facing challenges such as regulation, depolarisation, a slowdown in the mortgage market and embracing e-business, it would seem that a minimal amount should be expected in the short to medium term.

Further, the increasing dependence of the adviser market on the use of portals means that any such move would require a significant investment/change in systems.

Clearly, it is unlikely that change will come quickly so it would seem that the scales are still tipped in favour of the current CI products being around for some time yet.

That said, it is likely that the ABI CI working party will demand some change in the short term. It also seems likely that any new product will overlap with the current offer as all parties become more comfortable. Change is coming and we should embrace it to ensure that the protection market continues to grow.

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