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Critical moment

The dust hasn&#39t settled over recent guaranteed premium increases and changes to definitions but product providers are warning intermediaries that there are still substantial changes to be made if the health of critical-illness products is to be ensured.

Most providers believe reviewable premiums will become more popular as guaranteed rates cover risk inadequately.

Price has become a major concern for IFAs as the past two quarters saw premium increases of up to 50 per cent in some cases. But many providers maintain the hike was inevitable, returning rates to a more sustainable level.

Scottish Provident head of marketing and product development and chairman of the ABI&#39s critical-illness working party Nick Kirwan says: “It is true that the latest increases were substantial but rates have now settled to where they were about three years ago,”

Yet the market is wary over the implications of these changes. Combined with tighter illness definitions, the rate increases have made critical-illness protection less attractive to consumers.

Scottish Equitable head of marketing Heather Armstrong says: “Providers are looking carefully at their critical-illness products. Sales are still increasing but it will be harder to make further increases without expanding the product offering.”

The future of critical-illness cover will be guided by other factors as well. The industry is still waiting for new FSA regulations governing the sale of general insurance and protection products but high-level consultation papers outlining the proposed regulations have received a varied reception. The FSA has been severely criticised for its description of critical illness and income protection as high-risk products.

Kirwan says: “This is an unfortunate choice of words because the risk is actually proportionate to relatively low-risk general insurance policies. It is somewhat misleading and the industry is campaigning hard against this wording.”

Implementation of the regulations, originally scheduled for October 2004, has been put back to January 2005, providing lobbyists with more time to effect change.

Wording aside, product providers and IFAs feel that the legislation will pull insurance brokers into line. Armstrong believes the new regulations will not affect the market in the long term but their implementation may cause a consolidation of agents, who may need to band together to be able to adhere to stricter regulations.

Providers will need to work more closely with intermediaries, not only to ensure compliance but to provide more marketable protection products. Preparation for the new regulations may therefore present them with an opportunity to completely reassess the make-up of critical illness.

But with all the perceived problems that critical-illness insurance seems to be facing, it is still a popular product and has respectable growth figures.

Kirwan says: “Growth has been explosive for sales in protection. It is as strong as it has ever been. Weak investment markets create a focus on other areas, protection being one of them, and there are not too many signs this will stop any time soon.”

Skandia protection brand manager Shelley Robertson says: “Companies will be more likely to continue with the menu option because it is much more convenient to the client. The uptake will continue to be successful.”

Robertson believes that the next years will see more companies entering the market for reviewable premiums in an effort to sustain growth.

However, many IFAs believe it is up to them to push growth in critical illness, regardless of any future product development. Cambourn Financial director Mark Loydall says: “The necessary selling point for protection is education of the client, which in the end is up to the IFA. Most providers have been good with statistics but individual IFAs need to take education off their own bat.”

What is certain about the future of critical-illness protection is that the new generation of products will need to be more varied than their predecessors, with a greater emphasis on client education as the principal sales technique.

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