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Evolution or revolution?

When guaranteed critical-illness cover rates started to rise a couple of years ago, some providers predicted that the industry would have to develop a completely new product model if this type of cover was to survive.

Now that prices have stabilised, providers and reinsurers which withdrew from the guaranteed market have either returned or may be about to do so.

The ABI is due to conduct a review of the critical-illness definitions. If the market has stabilised, do we need to be considering a radically different product model or will it be sufficient to develop the current one?

This really depends on the problem we are trying to solve. The price increases of the last few years are due mainly to advances in medical science while the definitions used by critical-illness products have remained relatively unchanged.

When critical-illness cover was launched in 1986, the diagnosis of cancer or a heart attack often meant a very poor prognosis for the sufferer. Indeed, cancers could be quite advanced before they were detected, which unfortunately meant that curative treatment was difficult or impossible. The definitions used by the first policies in 1986 were based on medical practice and diagnostic techniques at that time but have changed very little since then.

Yet treatments are now much more successful and often do not have a serious effect on the patient’s lifestyle. Cancers can now be detected much earlier, often when tumours are quite small and when treatment can be more successful. This is good news for the sufferer, who now faces a much more positive prognosis, these advances in diagnostic techniques have led to many more claims being paid on critical-illness policies than were originally priced for. This has caused the recent upward pressure on prices.

With medical developments set to continue, perhaps the product could become unaffordable or even unpriceable. What are the alternatives for the industry to consider?

The most obvious route – and one undoubtedly being considered by the ABI – is an evolution of the current product. The idea would be to retain a set of definitions but to remove payments for mild and curable forms of illnesses and return the product to providing money when illness becomes life-changing.

This approach would be similar to that taken by the ABI in an earlier review in 2002. At the time, the Government was talking about introducing prostate cancer screening for men. This sort of cancer can be treated very successfully if caught early but screening could have increased the number of people claiming successfully for early-stage, treatable prostate cancer. The solution was to alter the definition to exclude early-stage cancers. This was the right move to make but the downside was an extra level of medical jargon written into the policy.

The evolutionary approach suggests adding tighter definitions and exclusions but there is a problem with this approach. Exclusions protect the product from the effects of medical advances yet, however well they are explained, if they result in a claim being turned down, consumers will see it as yet more small print.

If this is the way forward, clear communication to clients will be essential. They will need to understand exactly what is covered and what is not. Getting this across will be difficult with tighter definitions which rely on more medical terminology.

Another approach which has been suggested is to look at a radically different product model for critical illness – revolution rather than evolution.

Rather than use a list of illnesses with their own definitions, an alternative could be to develop impact-based definitions. These could be similar to the activities of daily work which providers use for total permanent disability but would be more generous. Payments would be made for any illness that created the specified impact on an individual’s lifestyle.

The impact-based approach has its attractions but would any company be prepared to launch something so completely different to a market still happy to sell the current model, albeit at higher prices?

For this reason, it is likely that the industry will settle on the evolutionary approach, which is the path of least resistance and should allow the product to remain successful.

But before we dismiss the revolutionary approach, it is worth asking one important question. If critical cover did not yet exist, given what we now know about the pricing and the structure of the current product, what would it look like if we developed it today from a clean sheet of paper?

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