A reinsurer’s rationale for optimism
Critical illness (CI) 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 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 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.
On a positive note, a lot has been done to redress these issues in affected markets, including standardised wordings (as introduced by the Association of British Insurers), 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 a sustainable and healthy CI 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. 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.
In contrast to niche products, some insurers have taken the alternative route of providing a more comprehensive protection, such as the hybridisation of CI insurance with other life products. Income protection (IP) insurance is perhaps the most mutually beneficial product partner, offering a combination of the virtues of CI lump sum and IP disability annuity. CI insurance has undoubtedly taken away from income protection sales (e.g. in the UK), but with the tightening of cover definitions through standardised wordings, there are many declined CI claims that might have become accepted IP claims and vice versa. A hybrid, as exists in the Australian market, protects the policyholder against such shortfalls.
The introduction of total and permanent disability (TPD) benefits is another approach to creating a more comprehensive cover while also better reflecting the impact of a condition. However, this commendable “catch-all” clause unfortunately led to a mismatch between the intention of the cover and policyholder perception of it. Also, from an insurance perspective, although the number of TPD claims is relatively small (UK), the time and level of expertise needed to underwrite the initial risks and adjudicate claims have been disproportionately high.