When Dr Marius Barnard invented critical illness cover in 1983, people were just starting to replace their scratched vinyl and mangled cassette collections with CDs.
Fast forward 33 years and we have digital downloads that would have been unimaginable in the early-1980s. Changes to individual CI cover have been more subtle in that time, covering more conditions, revising definitions or removing some altogether in line with medical advancements. But with sales in decline there is a realisation that fresh ideas are needed.
Some industry commentators have suggested the next phase of development could be a move towards annually renewable cover along the lines of car insurance. Would this appeal to a different set of consumers, perhaps younger people with less disposable income? Or would it be prohibitively expensive?
EY director Jason Whyte, a specialist in life and pensions, points out that premiums for individual protection policies have traditionally been agreed at the outset, remaining constant throughout the term.
“The reason behind this is that a customer’s risk profile increases over time: if you take out a policy in your 30s, the chance of you claiming in the first 10 years or so is quite low, but it starts to rise as you get older. The pricing reflects this and the insurer essentially uses the surplus from the early years of the premium, when there are few claims, to offset the cost of the later years when claims are more frequent,” he says.
“Without this, the premiums as you get older would be compared to those early premiums and likely perceived as a rip off.”
CI Expert founder Alan Lakey points out that as a new contract would be taken out each year, providers could legitimately insist on annual medicals, which would impact on the decision to insure and at what price. He thinks it would be difficult for advisers to market a product with no certainty beyond a year as to what conditions they would be covered for and how much it would cost.
Chiene + Tait Financial Planning financial analyst Trent Lyons thinks annually renewable cover would particularly disadvantage those in the 40 or above age group.
“There is a greater probability of this group suffering a critical illness, therefore increasing the importance of them having cover,” he says.
Legal & General data showing that 70 per cent of its CI claims are made by policyholders aged 40 and 60 supports this. Head of intermediary development at the group Richard Kateley says: “There is a clear need for CI cover among the older generation and if it became annually renewable, it is likely the people who most need this form of protection may have opted out of renewing the policy a long time ago.”
As Royal London senior product development manager Jennifer Gilchist points out, there are pluses and minuses to all products. Annually renewable CI cover would have the latest terms and conditions – a positive for customers if improved year on year. But the flip side is that it works the other way, providing reduced cover for some conditions or removing conditions no longer deemed critical.
As an example Gilchrist says: “Angioplasty used to be defined as a critical condition but by 2003 it was seen as largely routine. You would get only a partial payment now, not the maximum payout you would have got previously.”
SunLife protection director Mark Jones sees the merit in cheaper initial premiums for younger people, who arguably have less disposable income, but is concerned that annually renewable cover would eventually be too expensive.
“The product wouldn’t work if underwritten each year as the huge risk to the customer would be deteriorating health, causing premiums to increase to an unaffordable level. What is more, the cost of underwriting each year would add a lot of extra expense into the product,” he says.
Jones says this could be remedied by underwriting at outset for a maximum term. But it is likely customers would then be unable to switch providers at the renewal date, as a new provider would want to underwrite again.
Some commentators are concerned that consumers would shop around each year based on price without taking advice. First Complete protection manager Steve Berry says: “This has several negatives with the main issue being that products available on comparison sites often do not have the full range of conditions and options as an advised sale. It means customers end up with a lesser product and miss out on professional financial advice.”
“My own plan was taken out over 20 years ago and I still have a six-figure indexed cover for £37 a month. That would be very expensive for me to buy today.”