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Rates of change

Recent increases in guaranteed critical-illness premiums have brought

providers&#39 product development plans in this area sharply into focus.

We have seen most CI providers make significant increases to

guaranteed rates. We need to understand why this is happening and

what the outlook is for the market.

The reasons behind rising premiums could not be more positive.

Advances in medical science mean that diseases which 20 years ago

were regarded as critical are often no longer threatening to life.

Diagnostic techniques are more sophisticated and illnesses can be

diagnosed much more accurately or earlier than in the past, which

means there is much greater chance of the patient making a full


Increased diagnosis of illness has a direct impact on the number of

claims that insurers receive. When CI products were developed in the

1980s, they were shaped by quite different levels and costs of

claims. As the landscape shifts, so products must evolve.

Furthermore, as medical developments gather speed, it has become

impossible to predict how this will affect diagnosis and detection of

illnesses more thana few years down the line. This uncertainty makes

it extremely difficult for the underwriting and pricing of long-term

CI products.

In response to rising guaranteed rates, some providers have

introduced the option of reviewable rates, which can make cover more

affordable, at least in the short term. The availability of this

option should meet the immediate needs of the market. Ultimately,

however, major change in terms of product structure in the market

seems inevitable.

The key aim for providers must be to ensure that CI cover maintains

affordability and appropriateness. We must not allow the product to

become so expensive as to exclude vast sections of the population. As

consumer debt keeps rising, it is more important than ever to address

the protection gap affecting the population. Providers must ensure

the client pays an affordable price for cover that is of value to


Let us look at some of the directions that product development might

take. Until now, it has been concerned with two key areas – the list

of conditions which companies are willing to insure, over and above

the standard list prescribed by the ABI, and the incorporation of CI

as part of a menu, enabling IFAs to recommend it as part of an

overall tailored protection solution.

Second-generation products will significantly change the way this

type of product is structured and even marketed to clients. The first

second-generation products hit the market in 2002 and involve graded

cover. The onus here is on the IFA and client to select the preferred

level of cover from a range. The level selected will determine the

number and scope of the illnesses covered and resulting premium.

In some ways, this may be seen as a logical response to the progress

of medical science and the need to offer value-for-money cover. The

counter-argument is that it may be seen to erase much of the work

done by the ABI to achieve simplicity and a degree of uniformity of

cover in CI products. The success of this type of product relies

heavily on good communication between provider, IFA and client at the

time of purchase to prevent potential difficulties arising when a

claim is made. It also assumes a certain degree of medical knowledge

on the part of the client and IFA.

A more attractive concept may be standard renewable cover. This has

already been introduced as an option but, as products develop, a

reviewable five-year term may become a standard product feature,

offering automatic renewal to a pre-determined maximum age. The

coverage and definitions would be reviewed and premiums reset at the

end of each period. Premiums could be guaranteed for each five-year

term throughout the term of the plan.

For IFA and client, the advantages would be the ongoing certainty of

premium levels and knowledge of which conditions were insured. The

ability to adjust the conditions covered ensures ongoing

appropriateness for the client. For providers, the risk of

anti-selection may be reduced significantly.

These are only two possible structures for second-generation product

development. Whichever path we choose to follow, there are some key

considerations to bear in mind.

The overriding concern is maintaining IFA and client confidence that

the product will offer genuine value for money and will pay the

expected benefit should illness arise.

It is vital to take a realistic view of IFA and consumer

understanding of diseases and, as a result, CI product structures.

Ensuring that consumers understand fully the nature of the product

they are buying is paramount to eliminate the potential for

disappointment should a claim arise. It is important to acknowledge

the pivotal role that the IFA can play in this. The protection market

has entered an important growth phase and the last thing we need is

to stifle development through overcomplexity.

Providers should also take account of the sustainability of the new

shapes they design, taking into account the likely pace of medical

change in the future. While we are experiencing challenging times,

new product shapes do not have to become more complex. Consumer understanding,

simplicity and transparency are crucial and we should work to ensure

that future product developments reflect these.


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