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Will exodus from policy guarantees reach critical mass?

The announcement by Swiss Re that it plans to stop underwriting critical-illness guarantees has left product providers and IFAs wondering what the future holds for guaranteed business.

Currently representing 98 per cent of CI sales, policies sold with guaranteed rather than reviewable premiums have been the mainstay of the individual market since their introduction eight years ago.

But now Swiss Re, one of the two biggest underwriters in the UK protection market, has decided it is no longer willing to take the risk involved with guaranteed premiums.

It will continue to offer guarantees of up to five years and then policies will be subject to a review and face the possibility of rising premiums. The move will not affect existing policyholders, whose policies will be allowed to continue with a guarantee attached.

Swiss Re says constantly advancing medical technology and changing definitions of cover mean it is costly to tie itself in to policies which do not allow for premium reviews.

It cites recent changes to the ABI&#39s code of practice for CI, which saw the definition of what constitutes a heart attack broadened and the removal of prostate cancer cover from many new policies, as an example of why it is no longer prudent to work on a guaranteed basis.

Deputy chief executive Stephen McArthur says: “We will no longer provide guarantees. We do not think it is prudent to offer long-term guarantees of that nature because of the changing medical technology affecting instances of claims.”

All eyes are now turned to Swiss Re&#39s main rival in the protection underwriting arena, GE Frankona, to see if it will follow suit. If it does, the end could be nigh for CI policies with guarantees as it is unlikely that any of the smaller protection reinsurers will continue offering guarantees.

GE Frankona head of pricing and product development Azim Dinani says: “The issues in the marketplace make forecasting of claims extremely difficult, particularly when you are looking at forecasting 25 to 30 years forward.

“In this environment, while guarantees are still offered in the market, the future for guaranteed rates is obviously difficult to predict. It is quite possible that insurers will have to look at reviewing the basic product design and the benefit structure, together with the CI definitions, to limit the potential viability and make it more viable to offer guarantees.”

Swiss Re concedes that if other reinsurers do not follow its lead it could lose significant market share in the protection underwriting business.

But Winful Associates principal John Winful says: “I think other reinsurers will follow. I do not see how one reinsurer will remain offering guarantees, shouldering all the risk.”

One concern of the industry is likely to how the disappearance of guaranteed rates will affect sales, particularly where policies are attached to mortgages. But while some commentators suggest there will be a negative effect, others do not expect consumers to be worried.

Scottish Provident head of marketing and product development Nick Kirwan says: “If there is going to be change, it is clearly going to be an industrywide issue. What will not change, however, is the customer&#39s need to have the product and it will not change the customer&#39s desire to buy the product. I believe that customers will still buy CI without a guarantee.”

Portfolio Insurance consultancy principal Brian Lentz says: “The vast majority of CI that we sell is not based on a guaranteed premium, anyway.It is based on a whole-of-life structure, so we will not be that affected by this change. It will potentially change the sale of mortgage-related products and it is going to decimate the non-regulated discount brokers who will no longer be able to compete.”

Most product providers recognise that they may be forced to stop offering guaranteed policies in the future.

But Skandia protection brand manager Shelley Robertson says: “We intend to offer guarantees as long as possible on our CI policies. We are very keen for other reinsurers not to follow Swiss Re&#39s lead. The more we can do to offer customers guarantees in this uncertain world, the better.”

No one is sounding the death knell for critical illness but many believe that the market is facing a huge shake-up in the way that products are designed and marketed.

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