Poised for Prominence in Life
Contributor: Joanna Atkin, Life Pricing Actuary for the UK & Ireland, PartnerRe, John O’Neill, Head Life Market UK & Ireland, PartnerRe
With high customer appeal and all the makings of a prominent life product, we look how critical illness insurance is evolving to fulfill this potential.
Life & Health
Options for a healthy critical illness insurance:
- restoration of the original cover definition simplicity, e.g. “cancer only” covers, re-packaging the product for a more comprehensive cover solution
- the introduction of annual cover and premium reviewability, to align the product to risk cost evolution
- further service enhancements, such as tele-claims, to improve the customer experience and data collection.
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Critical illness insurance is an important and appealing life protection cover, offering policyholders the comforting reassurance of an immediate lump sum payment on diagnosis of a defined critical illness or need to undergo a defined serious medical procedure. Mortgage related sales have been particularly well received.
Unfortunately, despite initial commercial success, complex and widening medical cover definitions and other issues (such as the introduction of “Total and Permanent Disability”) have led to misunderstandings in respect of cover and high claim declination rates in recent years. At the same time, life insurers have suffered from data availability issues, non-disclosure, anti-selection and fixed terms and conditions for a risk linked to the rapidly advancing medical and social sectors.
A lot has been done to redress these issues in affected markets, including standardized wordings (e.g. as introduced by the U.K.’s ABI), the removal of exclusions as far as possible, and waiting periods. Tele-interviewing has been another very effective development to collect detailed risk information from applicants for underwriting and to reduce the risk of non-disclosure and anti-selection. In this article, we focus on other conceptual changes to the product’s delivery and design that could be applied to re-establish sustainable and healthy critical illness insurance, to the advantage of all.
Niche covers aimed at a target market are one solution to the cover complexity issue. In all cases, the customer makes a conscious choice to purchase limited cover at reduced cost. A good example is the “cancer-only” product; this covers the major cause of claims and, in some cases, forms of cancer that would be excluded from the traditional cover (such as forms that usually respond well to medical treatment). Products designed specifically for women have also grown in popularity; these typically cover the main risks to female health, again including forms of cancer that would otherwise not be covered and complications of pregnancy.
More comprehensive protection
In contrast to niche products, some insurers have taken the alternative route of providing a more comprehensive protection, such as the hybridization of critical illness insurance with other life products. Income protection insurance is perhaps the most mutually beneficial ‘product partner’, offering a combination of the virtues of critical illness lump sum and income protection disability annuity. Critical illness insurance has undoubtedly taken away from income protection sales (e.g. in the U.K.), but with the tightening of cover definitions through standardized wordings, there are many declined critical illness claims that might have become accepted income protection claims and vice versa. A hybrid, as exists in the Australian market, protects the policyholder against such short-falls.
The introduction of Total and Permanent Disability (TPD) benefits is another commendable approach to creating a more comprehensive cover while also better reflecting the impact of a condition. However, policyholder misunderstandings of what constitutes the definition of total and permanent disability unfortunately led to a high claim declinature rate. Also, from an insurance perspective, although the number of TPD claims is relatively small (U.K.), the time and level of expertise needed to underwrite the initial risks and adjudicate claims have been disproportionately high.
“Tiered” benefits provide a percentage of the cover when payment under standard CI conditions would not normally be triggered. Such products also allow multiple claims and maintain cover when premiums and benefits would otherwise cease. However, there is again potential for perception mismatch and dispute over the level of benefit paid. Clearly, some compromise is called for between simplicity on the one hand, and a correlation between benefit size and condition severity on the other.
Alignment to risk factors
If we talk about the future of terms and conditions, we must also consider trends in the risk factors that influence critical illness incidence rates, treatment and severity. Medical advances and social trends play the major role. Perhaps surprisingly though given medical advances, longevity and an increasing awareness of the causes of illness, it is generally agreed that incidence rates will on average deteriorate. This, and the need to maintain a product that supports only severe illness and the financial repercussions that that entails, necessitates a degree of flexibility.
Reviewable policy definitions and premiums, as exist for private medical insurance, would help achieve the required alignment: the policyholder is assured of having a product that remains appropriate to the actual risk and in addition need not pay the usual large premium guarantee loadings. Up-to-date definitions are of course also essential for claims assessment as evidence availability moves in line with medical advances. For reviewability to work, however, processes must be in place to inform and manage policyholder expectations, and the basis of change clearly set out.
Some insurers have built on the successes of tele-interviewing and are using qualified interviewers to assess claims; this makes the claims process less stressful for the claimant, is more cost efficient and also provides more detailed information to the insurer. Another positive innovation is to offer specialist medical advice and access to rehabilitation resources and nurse-led help-lines for emotional and practical support.
With careful product design and sound risk assessment, a critical illness product that meets the needs of all parties is certainly achievable.
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