The critical-illness concept looks set to undergo surgery but in what shape will it emerge?
Legal & General's recent survey on the future of the market confirmed that IFAs are keen to keep the guaranteed model.
Life Policies Direct director Jason King says only 28 per cent of its CI sales since the beginning of December were reviewable.
Lifesearch senior technical adviser Kevin Carr says: “A lot of people think guarantees will survive 2004 and if the market can then stabilise and the gap between reviewable and guarantees stays roughly where it is, at about 30 per cent, and if sales continue to be there, there may be no need for anything drastic.”
Legal & General protection event director Ronnie Martin believes the market will evolve over the next one to two years but says the industry should keep an open mind and not limit product development ideas over the longer term. He suggests that simplifying the tiered-benefit model could be the way forward.
What are the options for CI? Around six different product concepts emerge as possible contenders.
Obviously, the guaranteed product is the favoured option for IFAs. It is an easy sale and comfortable for the consumer but potentially leaves gaps in cover while insurers are open to paying out costly claims on conditions such as angioplasty that can hardly be considered critical any more as a result of medical advancements.
Reviewable rates offer cheaper premiums and better risk management as far as insurers and reinsurers are concerned but there are serious downsides. These include the risk of premium hikes and the prospect for the insurer of being selected against. There are also fears that such products may breach the Unfair Contract Terms Act.
The fixed definitions mean that insurers could be forced to make “windfalls” payouts on conditions that have become less serious with medicial advances.
In more uncharted territory are concepts such as the tiered-benefit model, which is the approach taken by Unum Provident for its Elixia 123 product. Mixing different potential payout levels with different premium levels, depending on what conditions are covered, it gets round the windfall problem but still has the downside of reviewable rates and complexity for the consumer.
Other variations include the impact-based model, which determines payout by the level of impact on the policyholder's life and severity of treatment. It solves the problems over windfalls, fixed definitions and coverage gaps but creates questions over measuring the impact of a condition.
The least favoured option for IFAs is the general insurance model, featuring reviewable rates and definitions, with other less savoury options including building from a different product base such as income protection.
Munich Re UK life branch general manager Martin Werth believes the current CI model is flawed and, while sales are high today, “there is a risk of brand damage tomorrow”. He says the solution has to start with identifying consumer need, taking account of the impact on life, such as ability to work, quality of life and invasiveness of treatment. The definitions should be as objective as possible to allow for advances in medical science as well as new risks.
Werth says: “We believe that the solution is to use the PMI model, with 'acute' replaced with 'serious life impact'. The policy should then define the measures.
“The structure allows us to widen the cover to meet genuine consumer needs and to protect the life office. The most difficult issue is the structure of the remuneration so that we can maintain the sales volumes.”