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Critical masses

The critical-illness insurance marketplace is forever being characterised by two unflattering traits – that it fosters an ongoing price war and that it is starved of product innovation.

The CI policy sales figures, which have declined drastically since 2002, do not make for happy reading.

In 2002, a total of 1,167,928 critical-illness insurance policies were sold in the UK but last year the figure is almost half that, at around 640,000 sales.

But despite the fall in sales, around 12 million adults and children are covered by critical-illness products.

Product innovation is not top of the agenda for providers according to advisers.

The general sentiment is that the products that are available are not meeting customer needs and there is not one product which is easy to understand and comprehensive.

Lifesearch head of protection strategy Kevin Carr says: “No one has really changed anything. The only two innovations of recent times have been the Virgin cancer cover product, the Big V, and the Prudential’s flexible protection plan. CI has also become a product to pay off your mortgage if you get ill which is not what it was designed for in the first place.”

But these new products have not been greeted with much acclaim.

Notably, Dr Marius Bernard, the pioneer of CI cover, recently slammed the Prudential’s product for being complicated and gimmicky.

Carr says: “The Prudential product is complex, costly and comprehensive but it is however a step in the right direction.”

CBK principal Peter Chadborn says there has been a lot of talk about the need for innovation but all that is happened is price war raging on.

He says: “I welcomed the Virgin Product for its innovation although I was not really a fan. I welcomed the Prudential product because it tried to do something different but, for some, it will be too complex. Hopefully, it should inspire others to do something similar. But the newer kids on the block, such as Royal Liver and Bright Grey are making some headway, in that their products are very comprehensive.”

Companies have concerns about creating something original because they have fears of getting it wrong and will then be forever associated with it.

Direct Life & Pensions sales and marketing director Richard Verdin explains that products have to fit into a category and tick a number of boxes, specifically, key product particulars, for comparison portals and websites or they get left on their own.

Verdin says: “As soon as one insurer creates a unique product, it makes advisers nervous as they find it hard to compare, for example, the Prudential product, but I believe there are other factors which could go against it too.”

Scottish Widows market director, protection and chairman of the ABI protection committee Nick Kirwan says there is no doubt that portals can be an obstacle barring entry to the market.

He says: “If you are to get your product to market, you have to have reach out to the mass market and a way of doing that.”

In some instances, says Royal Liver IFA market manager Andrew Milburn, the obstacle against innovation in CI products is people opting for the path of least resistance. He adds: “Networks can be a problem, in that if something new is released to the market, the network often has to give it approval or its advisers would have to carry out extra compliance themselves.

“There are still a huge amount of consumers who are covered by protection products. CI products in general would be sold better if advisers understood them better. I have heard from advisers that they themselves, in the majority, do not understand critical-illness products. Some 80 per cent of advisers did not know that ABI definitions were changing next year.”

Definitions have made products simpler and boosted sales but the move has arguably become counter-productive.

Verdin says: “Anything made easier is a good thing. Simplification and plain English will help, although we can see a gradual worsening in cover as it is being diluted in products compared with what it was four to five years ago.”

But Chadborn concedes that the providers are on one side and advisers on the other with Aifa and the Personal Finance Society in the middle.

“There needs to be better communication,” he says.

In 2005, Milburn took the CF3 exam, which covers financial protection products.

He says: “There was not one critical-illness question on the exam and these are the exams that advisers are taking.”

John Joseph Financial Services principal John Joseph says: “The FSA and FOS do not live in the real world so why should the examining bodies be anything different?”

But Joseph also believes insurance companies have taken away consultants who could have trained IFAs.”

Carr points out that providers need to come together to work on product innovation but there are issues with the Office of Fair Trading and competition law.

Verdin says: “You need a handful of providers to develop for innovation to be able to happen. Competition law is stifling innovation in the CI market.”

The Association of British Insurers has a binding agreement with the Office of Fair Trading.In the 1990s, the OFT told the ABI to put together a committee to iron out problems in the health insurance industry as it believed it to be anti-competitive as a result of complicated medical terminology.

The OFT wanted the industry to have standard industrywide definitions so for that, for example, cancer at company A meant the same as it did at company B.

This work was done by the critical-illness working party, which has since become the protection committee, which has a wider remit.

Kirwan says: “If we, as providers, get together to create and develop something entirely new, we have to fulfil two criteria. First, that it is in the best interests of the consumer and second, we have to prove that what we were doing could not happen on its own, as a result of natural market forces. The two arguments are not easy to satisfy.”

Verdin says: “There are lots of good ideas in the marketplace but no innovation. Competition law is stifling innovation in the CI market. Realistically, we need competition authorities to allow the insurance industry to work collectively.”

Joseph says: “The OFT should have one focus only – price fixing – not product-fixing.”

But Kirwan argues that it is not as simple as the Office of Fair Trading looking at price over product.

He explains: “If we believe there is a piece of work to be done, we would take it to the OFT. The OFT stated that if you call a product a CI insurance product, it has to meet certain conditions. If you call it something else, then it has to be something else, for example the Virgin Big V product is not a CI product, it is a cancer product.”

Kirwan notes that in terms of new ideas, there was an ABI initiative, with a working title of Underpin, in that the insurance was underpinned by definitions based on severity but he admits it has not progressed much further, saying: “It is on the workbook but not top of the list.”

Kirwan stresses insurers need to have an open dialogue with their customers, asking them what they need and want in a product and advisers must talk with the ABI and life offices about their own requirements.

But Chadborn asks: “Do providers canvass the opinions of IFAs to see what they want and need? They do come to me but I do have a profile in the media. Do they go to those who do not?”

He also asks how many people who design products have been in a customer-facing role or have shadowed someone in such a position.

Milburn says that another change that is urgently required is in the message from product providers. He says: “I believe these spokespeople have been saying the same thing for years. The problem with innovation is not just with the CI market, it is also a problem across the protection industry.”

But Lifesearch, as an adviser firm, is prepared to put its money where its mouth is. Carr says the firm has been working with a reinsurer to design a product but it is not yet ready.

He says: “We have feedback from 50 advisers and a client base of 200,000 and we know what their needs and frustrations are. In CI, there have been lots of bells and whistles introduced, such as Red Arc but that is not really changing anything.”

But despite the problems, Carr concludes: “It should be noted that 640,000-plus critical-illness insurance sales is still about four times as many sales as for income protection.”


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