What benefits do you expect to see in new-style critical-illness insurance?
Robertson: The critical-illness market is still in a state of flux and I think it will continue that way into 2004, certainly in terms of pricing and the level of guarantees. Nowadays, the competition to have the longest list of illnesses seems to have drawn to a close but there will always be scope for other product changes.
It would not surprise me to see an increase in the number of providers offering cover that has perhaps got more of a staged benefit feel to it – where more money is paid for the more “serious” conditions. In addition, I think we could see an increase in the number of clients who buy an “income”-based CI product rather than a lump sum, especially if the premiums continue to increase – as an income-based product keeps the costs down. In terms of rates, I think we will continue to see changes. I expect that the gap between reviewable and guaranteed premiums will continue to broaden – especially for longer-term policies.
Kirwan: Many people are talking about new-style critical-illness cover with reviewable definitions so that the illnesses covered can change after the policy starts. Those who support this concept suggest that this would allow the cover to remain up to date and cover illnesses that are critical at the time. However, it may prove hard to persuade consumers that this is not more about protecting the insurance company against rising claims than meeting consumer needs. Potential buyers may not trust insurers to apply changes fairly. The fear would be that the insurer might change what is covered just at the point that the policyholder is about to make a claim. “Sorry, we don't cover your illness any more.”
This fear may even undermine the very reason for buying cover in the first place – if you are not sure what the policy will cover, how do you know if you will need it?
To overcome these fears, the policy would need to offer protection about the timing and scope of any changes, indeed, the Unfair Terms in Consumer Contracts Regulations demand this to be absolutely clear and up front.
Armstrong: Affordability and appropriateness of cover are the two key characteristics that we must sustain, whatever happens to the structure of products in the future.
The protection market has enjoyed rapid and continuous growth over the last five years. We cannot risk jeopardising this trend through product design which does not meet customer needs.
IFAs should be aware that the current shape of critical-illness products will not be sustained indefinitely. We have already seen several leading providers withdraw guaranteed rates altogether in favour of more affordable reviewable rates. This provides an attractive solution to the problem in the medium term. In the longer term, we are likely to see different shapes emerging. There is no clear consensus as yet as to what the “next generation” of products will look like.
What are your views on the ABI's imminent consultation on questions that insurers can ask applicants on risks of HIV?
Robertson: The ABI is working hard to get the best result for all. We are fully behind it and, along with other providers, we will wait to see the outcome.
Kirwan: The industry has been working with a number of external bodies such as the BMA and we should take this as an opportunity to improve our medical questions with our ever increasing medical knowledge about conditions such as HIV and hepatitis B and C. Of course, this is an issue which affects most types of life and health insurance policies. The key will be to ensure that we get the balance right between the interests of all policyholders and those at greater risk from these conditions.
On one side, there is the need to avoid unnecessary and inappropriate questions about people's lifestyles when they apply to take out insurance cover.
On the other side, we need to retain our ability to underwrite health risks effectively to protect the interest of all policyholders.
If we do not get this balance right, then there are a number of potential consequences which will be bad for consumers. Less effective underwriting is likely to result in increases in premiums for everyone to allow for any expected increase in claims.
Another follow-on could be that insurers will be less willing to cover these conditions at all. The practical effect of this would potentially be more exclusions in policies and less cover for everyone.
Either way, we would not be serving consumers well if premiums were forced to go up or policies were to offer more restrictive cover. That is why this consultation and these negotiations are extremely important.
Armstrong: The ABI has worked closely with groups such as Stonewall and The Terrence Higgins Trust in putting the paper together and it will be interesting to see the outcome of these discussions. We are looking forward to seeing the forthcoming consultation paper.
It is important for insurers to have information that is useful yet appropriate when assessing applications.
The debate still rages over which is better to protect your mortgage – ASU or income protection. What is your take on the subject?
Robertson: Skandia does not offer income protection or ASU. However, from a purely personal perspective, I would assume that, if affordable, then both is the ideal.
ASU gives short-term cover against sickness and unemployment, while IP gives longer-term cover against sickness only. So unless you know that you are not going to be either long-term sick or unemployed, you would be better off with both.
Kirwan: Unemployment is generally a short-term need as most healthy people will be able to find another job within a year or so of a redundancy. However, accident and sickness is a long-term need because people will be unable to work for as long as the illness goes on for and potentially, this could be many years or even permanent in some cases. People should also be able to choose one without the other. For example, a self-employed person may not want to pay for unemployment cover. The ideal solution would offer a menu choice of short-term unemployment cover and long-term accident and sickness cover, which we offer through Self Assurance.
Armstrong: The beauty of a comprehensive income protection policy is that the client's income is covered for absence from work due to their ability to perform their occupation rather than cover being dependent on whatever caused the inability in the first place.
A frequent argument in favour of ASU is that it is a cheaper option but this is not necessarily the case. A modern flexible income protection product can be structured to cover mortgage repayments in the first instance but can be increased to cover the full income as and when the client can afford to.
However in these days of rising consumer credit. the mortgage is almost always not the only major debt that a client has and IFAs should bear this in mind when recommending cover.
What is new with critical-illness reviewable definitions and premiums?
Robertson: As mentioned earlier, I think the premium rates between reviewable and guaranteed premiums will continue to widen. Although there is much talk of reviewable definition products, I remain to be convinced as to how acceptable these would be in the mainstream market.
The biggest issue for the future will be the review process for reviewable premium plans. For those customers who choose to buy them, the basis that the plans will be reviewed on needs to be clearly explained and understood. The last thing that the industry needs is a portfolio of policies which have large premium rises where the clients did not appreciate that this could happen and do not understand why it has happened. It is important that as an industry we get our messages right today to manage expectations for the future. Therefore, it is important that providers and IFAs make it quite clear at point of sale and every year subsequently that the premiums can change. For example, it could be included in reasons-why letters and in any ongoing communication about the policy.
Kirwan: Reviewable premiums are not new. Scottish Provident has been offering a choice of guaranteed and reviewable premiums for many years and intends to continue doing so. Clearly, there is a customer need for each. Consumers are unlikely to be surprised by increasing insurance premiums, provided that any increase is seen to be fair. We are all used to our car insurance going up ever year.
Reviewable definitions are an altogether different kettle of fish. This would allow the insurer to change the illnesses that are covered after the start of the policy.
Armstrong: Reviewable premiums are not really new although they are fast becoming standard practice as the cost of guaranteed premiums continues to soar. Many IFAs who were previously reluctant to recommend reviewable rates are now doing so due to the differential in price between the two types of premium.
IFAs should be aware that some providers offer premiums which are guaranteed for five years, reviewed at the end of that time and then guaranteed for another five years. Others only offer 12 months fixed premiums before review.
Reviewable definitions, by contrast, represent a major departure from the current product structure and have been characterised as a “moving goalposts” scenario.
For this type of product to be successful will require excellent communication between provider, IFA and client to ensure that consumers are fully aware of what is and is not covered, and to avoid disappointment at claims' stage. As an industry, we must maintain a high degree of consumer confidence in protection products in order to eliminate the protection gap. This is likely to be challenging with a reviewable definitions' scenario.
At the same time as new entrants are joining the protection market, there are also others leaving it. Why is this?
Robertson: The protection market is no different to any other marketplace. There will always be those who come, go or stay a while. Protection is very price-sensitive and it can be quite a challenge for providers to balance the price offered with profitability, to say the least. This may be one reason why some companies choose to enter or leave the market, either as a whole or certain sectors of it.
However, the basic need for providing personal cover on death, disability and sickness has not diminished. In fact, as a market that has been around since Roman times in one form or another and with no published plans to provide more generous state benefits, I suspect it is a market that still has plenty of mileage.
Kirwan: Protection business is profitable for intermediaries and insurers, especially compared to other product lines, and this has attracted new entrants.
However, it also requires significant amounts of capital, for example, to meet the DTI reserving requirements and fund the up-front commission and medical costs, which are only reclaimed over time as the customer pays the premiums.
The prime driver of companies pulling out seems largely down to the availability of capital. Clearly, this is an issue that has been compounded by the stockmarket conditions in recent times.
Armstrong: It is difficult to determine one particular reason why this should be the case. Although the protection market has a number of well established players, there is still considerable scope for new business development. It has been estimated that the income protection gap alone amounts to over £130bn. It is still a very underdeveloped market.
At the same time, it is fundamental that insurers have the financial strength necessary to weather equity market volatility and the capital backing to secure their protection business.
Shelley Robertson, protection brand manager,Skandia
Nick Kirwan, head of marketing and product development,Scottish Provident
Heather Armstrong, head of marketing, Scottish Equitable Protect