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Critical rethink

Rarely in the protection market has a product achieved the sales momentum and appeal to customers, distributors and life offices in the way that critical-illness cover has.

But a recent report from Mercer Oliver Wyman claims that the sector has hit problems and needs product innovations in design and marketing.

The 1990s saw double-digit growth for critical sales but it now faces a key challenge with reinsurers unwilling to take on risk over concerns that they might be hit by huge claims as medical science advances.

An example could be a man who has a less virulent prostate cancer detected early, receives treatment and is given a good prognosis, but still gets a payout from his critical policy.

The Mercer Oliver Wyman report offers some options on how the market could respond to these concerns but some IFAs consider the problem is not crucial.

Dennehy Weller & Company managing director Brian Dennehy says: “There may be the odd case that falls through the net but I don&#39t think it is as many as it is made out to be.”

Among the first product solutions offered by the report is reviewable coverage, which simply refers to doing away with what it calls “any onerous guarantees”. Mercer suggests that neither guaranteed premiums nor guaranteed coverage under a policy are viable in the future market. Guarantees are expensive and do not fit with modern medical realities.

The report acknowledges that marketing products with reviewable definitions requires “careful consideration”. For advisers, this would seem to be an understatement.

Dennehy says: “Watering down definitions on an ongoing basis is a complete no-no. It opens up huge complaints later. Altering definitions should be restricted to new business only. We should not make the product so mixed up that it sets up another black hole for the industry to walk into.

“In any other industry, if business is too expensive or non-profitable to sustain then they do not write it any more. If this is becoming the case with critical illness, then they simply should not write it.”

The MOW report also acknowledges the problems likely to arise with recently tightened definitions if they have been altered around the time of individual claims being settled.

Dennehy says: “This would create a lot of potential for creating a terrible picture on the way that the industry operates.”

Other ideas put forward in the MOW report include what it terms the disability underpin. This shifts the focus on whether or not claims will be met from illness definitions to the quality of life of the policyholder.

This would mean that, in addition to meeting a contract&#39s illness definition, the policyholder would also need to demonstrate a certain degree of underlying illness or disability before a claim became valid. This might include failing one or more of the activities of daily living.

But advisers feel this is again sending out the wrong message to the public. M2 Financial managing director Mark Howard says: “It is only in the last five or six years that consumers have started to take critical-illness cover seriously and are aware of the need to have it. We are only just achieving consumer understanding and suggestions such as this will only undo this.”

A further product solution offered by the report is scaled benefits, where the sum assured is not fixed but depends on the disease suffered. MOW recognises that this adds a level of complexity but this type of contract could have a place in the higher sum assured market, where the sum is more than £1m for personal cover.

MOW also says there is a need for “living” or non-cash benefits, which could include counselling, sourcing medical experts and links to vetted therapists, such as occupational therapists, at discounted rates.

But Howard is scathing at the suggestion, saying: “Someone has just gone through the most traumatic experience of their lives and you&#39re going to send round a herbalist? These suggestions are namby-pamby and do not deal with what this product is about – providing a safety net when things go wrong.”

Dennehy says: “The future of critical-illness cover will be about what the client needs. Generally speaking, this is financial flexibility and non-cash benefits will not help that.”

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