Individual CI SURVEY: INDIVIDUAL CRITICAL ILLNESS. Table key. What the tables show

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1 Individual CI Critical illness (CI) has finally succumbed to the slump that has been blighting the protection market. But resurrecting the product may be an issue of reinvention as Peter Madigan discovers In a protection market that has looked pretty bleak in the last few years, critical illness (CI) insurance has been one of the few success stories. In the 20 years since its creation, the product has established itself as a market leader that had seemed impervious to the slump that has struck its stable mate, income protection (IP). It now appears however, that its good run is over and following a drop in sales in 2003, it appears the product is now in full-blown decline. Perhaps the most worrying fact about the situation is the speed with which CI s fortunes have turned. With the same swiftness that characterised its assent to the peak of the protection market, in just two short years the product has performed an about turn with a staggering 30.9% drop in sales in 2004, according to Swiss Re s Term and Health Watch This drop is particularly significant because of its size; while IP has been declining for several years, never has it seen such a sharp drop in just 12 months. It would not be an exaggeration to claim that the individual CI market is in crisis on the strength of these latest figures. But what can advisers and providers do to rally the market in the coming year and what is behind this huge drop? Pricing factors More than half of all critical illness policies are sold alongside mortgages and therefore sales have suffered as the housing market has slumped, says Roger Edwards, products director at Bright Grey. While the housing market is certainly a contributory factor it should not be taken in isolation. Something else is stifling the market, the same thing that is slowing the housing market price. The price of critical illness products has been going up, especially for guaranteed rates. We are now in a situation where a client taking out term assurance is not prepared to pay the extra for critical illness. Their life cover may cost 20 a month, but including critical illness will increase the cost to 70, says Edwards. This situation is also exacerbated by differing age profiles. For a 15-year term assurance policy with What the tables show Table 1: Contract details Critical illness term 30 Table 2: Contract details Critical illness term rider 31 Table 3: Conditions covered Critical illness term Table 4: Critical illness term premiums Female 34 Table 5: Critical illness term premiums Male 35 Table 6: Critical illness term CIC rider Female 36 Table 7: Critical illness term CIC rider Male 37 critical illness for a 30-year old male, they would have paid 9 a month in Today they will pay 12 a month, says Stuart Bayliss, managing director at Annuity Direct. If we write an identical contract for a 50-year old male, in 2003 his premium would have been 44. Today it is 62. With this kind of price increase it is hardly surprising older people are questioning the value of critical illness, he adds. Such complaints about price rises may seem odd considering the highly publicised rate war currently being waged in the CI market. Barely a week goes by without a rate cut from a provider. Rates are the lowest they have been for some time but they are still higher than they were four years ago when we began to see the real acceleration in cost, says Steve Casey, individual protection product manager at BUPA. So how do we breathe new life into this market? The first step would seem to be by cutting the cost of cover, but some providers claim that the current inflated prices are here to stay. It is the claims experience that is driving the rise in price because we underestimated the number of claims we would receive for critical illness, says Mark Anders, head of sales at Liverpool Victoria. We were all selling critical illness too cheaply in the past and it would appear that current prices represent a long-term correction, he adds. If price is no longer negotiable then a reassessment of the cover on offer may provide another means of managing costs. Middle to late 2005 will see the Table key cont. page 40 Yes No COVER September

2 Table 1: Contract details Critical illness term Companies Contract Term Level Decreasing Renewable Joint First Event Joint Second Event Single Minimum Single Maximum Joint Minimum Joint Maximum Benefit Ceases At Age (Male) Benefit Ceases At Age (Female) Abbey Plan AXA Cover Bright Grey ion from Bright Grey BUPA Plan 19 See notes 19 See notes Term end Term end 14 BUPA Plan - Renewable 19 See notes 19 See notes Term end Term end 14 Friends Provident Select ion Critical Illness Cover NB 70 NB 14 Legal & General Cover (Level) Legal & General Mortgage Decreasing CIC Legal & General ion Choices Norwich Union Plan NB 65 NB 14 Business ion NB 85 NB 14 Scottish Provident Self Assurance Term - Business Scottish Provident Mortgage ion NB 85 NB 14 Personal ion NB 85 NB 14 Self Assurance Term - Personal N/A N/A N/A N/A 14 Scottish Provident Self Assurance-Mortgage N/A N/A 14 Scottish Widows ion Plan - Level NB 70 NB 21 Scottish Widows ion Plan - Mortgage NB 70 NB 21 Skandia Skandia (Fixed Term) days Skandia Skandia (Rolling Term) No max No max 14 days ion Plan (decreasing) ion Plan (Income) ion Plan (level) UnumProvident Elixia Full N/S N/S UnumProvident Elixia Split N/S N/S Zurich Assurance Ltd style Plan Survival Period (Days) Notes to tables 1 & 2 BUPA Maximum age at entry NB is 60 and the maximum expiry age is 70 Virgin Money NC Benefit ceases at age male/female Policy limit age COVER September 2005

3 Table 2: Contract details Critical illness term rider Companies Contract Term Level Decreasing Renewablrated Accele- Joint Joint Joint Split Sum Single Single Joint Joint Benefit Benefit Death Cover First Event Second Event Contract CI On 1 Only Assu red Minimum Maximum Minimum Maximum Ceases At Age (Male) Ceases At Age (Female) Abbey & Critical Illness Plan AXA or Earlier Cover Bright Grey ion from Bright Grey BUPA 19 See notes 19 See notes See notes See notes N/A With Cover BUPA 19 See notes 19 See notes See notes See notes N/A With Cover (Renewable) Friends Provident Decreasing Term NB 65 NB 0 with CIC Friends Provident Level Term with NB 65 NB 0 CIC Friends Provident Select ion NB 65 NB 0 or Earlier Cover HSBC (UK) LTA with CI Ltd Benefit Legal & General ion (CIC) 65 (CIC) 0 Choices Legal & General The Term (CIC) 65 (CIC) 0 Assurance Plan Liverpool Victoria MIMI Norwich Union Level Term NB 65 NB 0 Assurance Norwich Union Mortgage NB 65 NB 0 Insurance Prudential Prudential Intermediary ion Division Royal Liver ion Menu Assurance Limited Business NB 85 NB 14 ion Mortgage NB 85 NB 14 ion Personal NB 85 NB 14 ion Scottish Provident Self Assurance N/A N/A 14 Term - Business Scottish Provident Self Assurance N/A N/A 14 Term - Personal Scottish Provident Self Assurance N/A N/A 14 Mortgage Scottish Widows ion Plan NB 70 NB 0 - Level Scottish Widows ion Plan NB 70 NB 0 - Mortgage Skandia Skandia (Fixed Term) Skandia Skandia No max. No max. 0 (Rolling Term) time ion Series Rider Virgin Money N/A N/A See notes See notes N/A - NC Plan Survival Period (Days) COVER September

4 Table 3: Conditions covered Critical illness term Companies Contract Childrens Benefit Aorta Graft Surgery Aplastic Anaemia Bacterial Meningitis Benign Brain Tumour Alzheimers Angioplasty Blindness Cancer CJD Coma Complete Liver Failure Abbey Plan AXA Cover Bright Grey ion from Bright Grey BUPA Plan BUPA Plan - Renewable Friends Provident Legal & General Legal & General Select ion Critical Illness Cover Cover (Level) Mortgage Decreasing CIC Coronary Artery Bypass Surgery One Artery Two Or More Arteries Legal & General ion Choices Norwich Union Plan Business ion Heart Attac Mortgage ion Personal ion Scottish Provident Scottish Provident Scottish Provident Self Assurance Term - Business Self Assurance Term - Personal Self Assurance- Mortgage Scottish Widows ion Plan - Level Scottish Widows ion Plan - Mortgage Skandia Skandia Skandia (Fixed Term) Skandia (Rolling Term) ion Plan (decreasing) ion Plan (Income) ion Plan (level) UnumProvident Elixia Full UnumProvident Elixia Split Zurich Assurance Ltd style Plan 38 COVER September 2005

5 k Heart Valve Repair Heart Valve Replacement HIV / AIDS Cover From Blood Transfusion As A Terminal Illness Medical Profession Kidney Failure Loss Of Limbs Major Organ Transplant Motor Neurone Disease Multiple Sclerosis Parkinson s Disease Total & Permanent Disability Own Own Or Similar Any ADLs COVER September

6 Table 4: Critical illness term premiums Female Company Contract Cost Term 10yr Female 30 nb 100k Cost Term 10yr Female 40 nb 100k Abbey Plan (5.33) (4.97) (5.58) AXA Cover (5.44) (4.07) (3.98) Bright Grey ion from Bright Grey (6.42) (5.5) (4.95) BUPA Plan (6.22) (5.92) (5.9) BUPA Plan - Renewable (5.31) (4.87) (4.79) Friends Provident Select ion Cover (7.42) (6.6) (6.18) Legal & General Mortgage Decreasing CIC (9.86) (9.76) (10) Legal & General Cover (Level) (8.5) (8.3) (7.69) Legal & General ion Choices (8.5) (8.3) (7.69) Norwich Union Plan (5.98) (5.65) (4.72) Business ion (7.75) (7.62) (6.85) Personal ion (7.75) (7.62) (6.85) Mortgage ion (7.75) (7.62) (6.85) Scottish Provident Self Assurance-Mortgage (7.46) (6.85) (7.35) Scottish Provident Self Assurance Term - Personal (7.46) (6.85) (7.35) Scottish Provident Self Assurance Term - Business (7.46) (6.85) (7.35) Scottish Widows ion Plan - Mortgage (7.72) (7.24) (7.89) Scottish Widows ion Plan - Level (7.28) (6.58) (6.14) Skandia Skandia (Fixed Term) (4.52) (4.93) (5.13) Skandia Skandia (Rolling Term) (3.85) (4.16) (4.75) ion Plan (decreasing) (9.29) (8.49) (7.66) ion Plan (Income) (7.4) (8.27) (8.75) ion Plan (level) (7.28) (5.83) (5.16) UnumProvident Elixia Split (10) (10) (9.94) UnumProvident Elixia Full (8.35) (7.79) (7.46) Zurich Assurance Ltd style Plan (7.71) (7.29) (6.49) Cost Term 10yr Female 50 nb 100k Association of British Insurers (ABI) critical illness working party re-examine existing definitions of CI contracts and tighten those definitions in an effort to both future proof the product against the latest medical developments and ensure that cover remains affordable. Could this meeting provide a solution to rocketing costs and plummeting sales? Fresh thinking The ABI is going to consult on whether we should introduce a second tier cancer definition that will only cover cancer that has spread throughout the body, reveals Edwards. If a product only covered this more restricted cancer, then it would be cheaper than the current definition. While such moves to make definitions more robust may well result in cheaper cover in the short-term, some advisers are frustrated with providers unwillingness to commit to more radical changes. I hope that they stop tinkering around with definitions and start making the changes needed. The ABI working party should be about innovative solutions not anal-retentive definitions, says Richard Verdin, sales and marketing director at Direct and Pensions. The kind of solution that Verdin refers to has been mooted for some time, but as yet, regarded only as a great concept that is impossible to put into practice. The problem with the ABI working party is that they fear being too radical and do not want to take the risk of coming up with a new product that IFAs will reject, says Andy Milburn, IFA marketing manager at Royal Liver. They have a grave fear of failure. The kind of 40 COVER September 2005

7 Table 5: Critical illness term premium Male Company Contract Cost Term 10yr Male 30nb 100k Cost Term 10yr Male 40nb 100k Abbey Plan (4.87) (5.06) (5.21) AXA Cover (5.83) (4.02) (3.57) Bright Grey ion from Bright Grey (7.45) (5.59) (5.42) BUPA Plan (7.19) (6.7) (6.56) BUPA Plan - Renewable (6.49) (5.8) (5.61) Friends Provident Select ion Cover (7.19) (6.28) (6.92) Legal & General Mortgage Decreasing CIC (9.34) (9.57) (10) Legal & General Cover (Level) (8.13) (7.93) (7.94) Legal & General ion Choices (8.13) (7.93) (7.94) Norwich Union Plan (6.77) (5.58) (5.42) Business ion (7.85) (7.04) (7.63) Personal ion (7.85) (7.04) (7.63) Mortgage ion (7.85) (7.04) (7.63) Scottish Provident Self Assurance-Mortgage (7.8) (7.23) (7.84) Scottish Provident Self Assurance Term - Personal (7.8) (7.23) (7.84) Scottish Provident Self Assurance Term - Business (7.8) (7.23) (7.84) Scottish Widows ion Plan - Mortgage (6.01) (5.4) (6.25) Scottish Widows ion Plan - Level (5.53) (3.84) (4.04) Skandia Skandia (Fixed Term) (4.45) (4.84) (6.07) Skandia Skandia (Rolling Term) (3.93) (3.94) (5.63) ion Plan (decreasing) (8.76) (8.04) (7.41) ion Plan (Income) (6.73) (7.83) (8.52) ion Plan (level) (6.67) (5.13) (4.49) UnumProvident Elixia Split (10) (10) (9.92) UnumProvident Elixia Full (8.39) (7.96) (7.66) Zurich Assurance Ltd style Plan (8.51) (7.47) (6.88) Cost Term 10yr Male 50nb 100k solution that we are talking about would be impactbased critical illness, where the policy pays out not on diagnosis but at a stage where it has progressed to a level that it is now a truly critical illness. That is a great idea, but how would it be assessed? Milburn adds. A development of this kind would presumably slash CI rates as windfall payments for non-critical conditions, such as mild heart attacks, would be eliminated, and although there are undeniable logistical problems to work through, some providers think that impact-based CI deserves a more thorough assessment. We run away from this idea since we cannot do it cost effectively, but why are we just brushing it aside? If we set aside all of the good ideas because they had problems that no one could be bothered to work through, then we would never achieve anything, says Casey. The idea has been given much discussion but talk is pointless if providers are unwilling to take a risk and launch a product of this kind. I just cannot see a company launching something so different into an advisory market that is so used to the current product and would feel vulnerable recommending anything totally different, says Edwards. Gloomy outlook The market looks set to see similarly dismal times in the year to come. The housing market is expected to remain cool, growing at a fraction of the speed it has done in the last few years. The debate over whether total and permanent disability (TPD) cover should be withdrawn because of its high declinature rates will rage on and pension simplification legislation will probably detract adviser attention from CI. COVER September

8 Table 6: Critical illness term CIC rider Female Company Contract Cost Term CIC Rider 10 year Female 30nb 100k SA PM Cost Term CIC Rider 10 year Female 40nb 100k SA PM Abbey & Plan (6.25) (5.8) (6.49) AXA or Earlier Cover (7.47) (6.36) (5.82) Bright Grey ion from Bright Grey (8.76) (7.48) (6.79) BUPA With Cover (8.54) (7.84) (7.87) BUPA With Cover (Renewable) (7.64) (6.82) (6.78) Friends Provident Decreasing Term with CIC (9.83) (8.89) (8.46) Friends Provident Level Term with CIC (7.58) (6.55) (6.19) Friends Provident Select ion or Earlier Critical Illness Cover (7.58) (6.55) (6.19) HSBC (UK) Ltd LTA with CI Benefit N/A N/A N/A Legal & General The Term Assurance Plan (9.99) (9.13) (8.7) Legal & General ion Choices (9.99) (9.13) (8.7) Liverpool Victoria MIMI (7.5) (5.92) (4.99) Norwich Union Mortgage Insurance (10) (10) (10) Norwich Union Level Term Assurance (8.59) (8.12) (7.47) Prudential Intermediary Division Prudential ion (8.01) (7.3) (6.19) Royal Liver Assurance Limited ion Menu N/A N/A N/A Personal ion (9.14) (7.38) (6.93) Business ion (9.14) (7.38) (6.93) Mortgage ion (9.14) (7.38) (6.93) Scottish Provident Self Assurance-Mortgage (8.33) (7.46) (7.37) Scottish Provident Self Assurance Term - Personal (8.33) (7.46) (7.37) Scottish Provident Self Assurance Term - Business (8.33) (7.46) (7.37) Scottish Widows ion Plan - Mortgage (8.97) (8.09) (8.83) Scottish Widows ion Plan - Level (8.54) (7.42) (7.06) Skandia Skandia (Fixed Term) (5.77) (5.76) (6.04) Skandia Skandia (Rolling Term) (5.1) (4.98) (5.66) time ion Series Rider (7.62) (6.32) (5.92) Virgin Money - NC Plan N/A N/A N/A Cost Term CIC Rider 10 year Female 50nb 100k SA PM One offshoot of pensions regulation that will profoundly influence the protection market is the birth of pension term assurance (PTA). Under the new rules, term assurance contracts can be written in a pension trust and qualify for tax relief. This could potentially mean unprecedented re-broking opportunities for intermediaries as existing term assurance contracts could be rewritten to secure the tax break for clients. But this news is far from all good. The first problem is that advisers have to be regulated to advise on pensions to sell this product and we do not even know if critical illness will be available as a rider benefit on a pension term assurance scheme, says Casey. There is no clarity at the moment. Everyone is looking to the final statement on the subject from the FSA in September. Indeed the lack of clarity seems to be so severe that some providers appear to be hearing entirely different things. My understanding was that pension term assurance is just an option for life cover and that critical illness as a rider benefit would not be included, says Mark Anders, head of sales at Liverpool Victoria. Although CI will still be available with traditional term assurance plans post A-Day, why would a customer buy this when they can secure cheaper premiums through PTA? This would be a huge blow to the already beleaguered CI market. On top of this, even if accelerated CI can be written with PTA, intermediaries 42 COVER September 2005

9 Table 7: Critical illness term CIC rider Male Company Contract Cost Term CIC Rider 10 year Male 30nb 100k SA PM Cost Term CIC Rider 10 year Male 40nb 100k SA PM Abbey & Plan (6.53) (6.79) (6.34) AXA or Earlier Cover (7.63) (6.64) (6.84) Bright Grey ion from Bright Grey (8.74) (7.75) (7.07) BUPA With Cover (8.68) (8.53) (8.04) BUPA With Cover (Renewable) (7.85) (7.09) (6.59) Friends Provident Decreasing Term with CIC (9.83) (9.64) (8.88) Friends Provident Level Term with CIC (8.1) (6.81) (6.54) Friends Provident Select ion or Earlier Critical Illness Cover (8.1) (6.81) (6.54) HSBC (UK) Ltd LTA with CI Benefit N/A N/A N/A Legal & General The Term Assurance Plan (9.75) (9.46) (9.21) Legal & General ion Choices (9.75) (9.46) (9.21) Liverpool Victoria MIMI (7.82) (6.57) (5.01) Norwich Union Mortgage Insurance (10) (10) (10) Norwich Union Level Term Assurance (8.46) (7.74) (7.42) Prudential Intermediary Division Prudential ion (8.14) (7.02) (6.54) Royal Liver Assurance Limited ion Menu N/A N/A N/A Personal ion (9.04) (7.68) (7.38) Business ion (9.04) (7.68) (7.38) Mortgage ion (9.04) (7.68) (7.38) Scottish Provident Self Assurance-Mortgage (8.72) (7.87) (7.56) Scottish Provident Self Assurance Term - Personal (8.72) (7.87) (7.56) Scottish Provident Self Assurance Term - Business (8.72) (7.87) (7.56) Scottish Widows ion Plan - Mortgage (7.67) (7.13) (7.41) Scottish Widows ion Plan - Level (7.18) (5.57) (5.12) Skandia Skandia (Fixed Term) (6.11) (6.57) (7.22) Skandia Skandia (Rolling Term) (5.59) (5.67) (6.77) time ion Series Rider (7.31) (6.72) (5.67) Virgin Money - NC Plan N/A N/A N/A Cost Term CIC Rider 10year Male 50nb 100k SA PM who are not regulated to write pensions business would be unable to advise on these schemes in any event. If the past year was tough in the CI market, the coming 12 months may lay down the template for the eventual fate of the product. A flat housing market, large numbers of claims and high premiums have conspired to make life very difficult for CI providers and advisers. The product model that has proved the star of the protection industry in recent times is now looking increasingly obsolete and out of touch. It would seem that unless providers dare to unleash the much debated impact-based CI products they have been discussing for years, CI in its current form may find itself in serious trouble. Disclaimer Synaptic Systems Ltd makes every effort to ensure any data provided is of the highest integrity. Synaptic Systems Ltd cannot accept any responsibility for any errors or omissions, nor can it warrant that any information supplied, or verified, by a third party is wholly accurate or complete. COVER September