Critical illness cover has swept all forms of mortgage protection before it in recent years. Barely 15 years old, this relatively new kid on the health-protection block has soared ahead of old timers such as income protection.
Simple to understand, popular in practice, its success has been well merited. And, with intermediaries' income squeezed on other fronts, it is playing an increasingly important role in their portfolio of products.
However, many in the industry argue that CIC is now standing at a crossroads and must adapt to survive. The challenge is to make sure it doesn't sacrifice the features that made it so charming in the first place.
CIC pays out a tax-free lump sum when the policyholder is diagnosed with a serious illness such as cancer, heart disease, kidney failure or stroke. The money can be used for anything, from adapting a home or lifestyle after illness to taking a recuperative holiday, but most people take out CIC with the aim of clearing their mortgage.
Sales growth has been impressive, outpacing rival forms of health protection – life insurance, income protection and unemployment benefit – according to figures published in February by Scottish Provident.
The number of homeowners covered by CIC rose from 2.86 million to 3.3 million over the previous two years, a rise of 440,000 policies. Sales have outstripped income protection and three out of 10 homeowners now have CIC, a 15% increase.
Nick Kirwan, head of product development and marketing at insurer Scottish Provident, says continued sales growth has since pushed the number of policies beyond four million. “Seven out of 10 CIC policies are sold to people taking out a mortgage. The key driver of growth has been the strong housing market. This has not only driven up the number of sales, but also boosted the average policy size as people cover larger home loans.”
The industry can do much more to boost sales. “The recent explosion in CIC is encouraging but it still means the majority of homeowners are unwittingly gambling with their homes. More than seven million households still don't have cover, which represents a great opportunity for advisers,” he adds.
CIC is undersold and people remain “grossly under-insured”. Kirwan says: “Advisers are increasingly geared up to sell CIC alongside a new mortgage but could do much more to promote policies to existing homeowners on their books who have no cover.”
Several negative factors have fuelled CIC sales growth. The 1% stakeholder world has cut intermediaries' margins and left them to look for alternative income opportunities in protection. The Sandler report may speed up this process. “Turbulent stockmarkets have also hit sales of ISAs and unit trusts, and endowment policies have tumbled out of favour, forcing intermediaries to focus more on protection,” Kirwan says.
A more positive factor was the Association of British Insurers' statement of best practice for CIC, published in May 1999. This standardised generic terms and the description of CIC in key features documents and introduced model wordings for core and additional conditions, and also model exclusions. “This made CIC much clearer. It was the product's coming of age and sales have doubled since,” says Kirwan, who also happens to be chairman of the ABI's critical illness working party.
He says take-up of life insurance shows that homeowners understand the need for protection. “Six out of 10 homeowners have life cover yet, in many cases, CIC is more useful, particularly for single homeowners without dependants, where life cover protects the lender more than the borrower. They are also three times more likely to suffer a serious illness before age 65 than die.”
Intermediaries must get across the message that the state won't provide if clients fall sick long term and neither will their employer. “Too many people still believe their employer or stepped benefits will protect them, while others exaggerate the cost of cover as an excuse for doing nothing. This underlines the need for advice, as a good intermediary can set out the financial facts of life.”
As booming property prices encourage homeowners to stretch income multiples ever higher, Kirwan fears many purchasers, particularly first-time buyers, may be tempted to skip CIC to prevent further strain on their finances. “Advisers must encourage them to take at least a basic level of cover, then increase the sum assured as their financial situation improves.”
One way to do this is to buy a menu-based protection plan. These allow clients to choose from a number of health protection policies within the same contract – typically life, CIC and income protection, and sometimes unemployment cover and health cash benefits. Some policies, notably Skandia, even include long-term care.
Menu-based protection was pioneered by Scottish Provident through its Self Assurance plan and its award-winning success has encouraged a host of 'me-too' products from Friends Provident, Liverpool Victoria, Skandia, Scottish Equitable and Swiss Life, with Scottish Life and others waiting in the wings.
Menu-based protection plans cut administration costs, as only one set of underwriting and policy forms are required. They also allow flexible switching between type and level of cover at different life events, such as marriage, children or moving house.
Dale Tranter, senior researcher with Misys IFA, says selling CIC as part of a menu package may suit some clients, but not everybody. “Advisers should examine the individual benefits in the package carefully to make sure they all stack up. If a menu offers attractive CIC but second-rate income protection, look elsewhere. However, in most cases, the client just wants term assurance and maybe CIC to protect their mortgage. Selling a menu product to a customer wanting more straightforward cover may be doing them a disservice.”
Many products offer intermediaries one further advantage. “Advisers have an excellent excuse to see their client annually to review cover and can prompt them to top up the policy, or buy further products and services,” he says.
Steve Buttercase, IFA for Lamensdorf, says menu-based products can cut clients' premiums and allow advisers to tailor cover to their individual needs. “Scottish Provident Self Assurance is still the most attractive plan, recently strengthened by adding unemployment cover and health cash benefits. Legal & General is very competitive on premiums, which is particularly important for clients with a higher sums assured, and I also like Swiss Life.”
Bhavesh Amlani, director of London-based IFAs Simple Savings, has the ideal client profile for CIC – most are young, self-employed and single, with nobody to support them financially if they fall seriously ill. Serious illness could also destroy their businesses. Yet many still hide behind the 'it won't happen to me' excuse. “I don't find CIC that easy a sale. The cost still puts many people off, premiums are up to three times basic life cover and many still prefer to take their chances. Clients with dependants, particularly young children, tend to be more responsible and more receptive to buying cover.”
Client reluctance makes low premiums a priority. “My preferred insurers are Legal & General, Scottish Equitable and Norwich Union. All offer competitive premiums and a decent level of cover. Claims experience has also been good.”
CIC is often mentioned in the same breath as income protection, which pays a continuing income if the policyholder is unable to continue working due to ill health. This is typically arranged to cover all monthly outgoings and payouts continue until the policyholder is able to return to work, or reaches retirement age.
Income protection pays out on ability to work rather than specific illnesses, which means it can cover stress and musculoskeletal disorders – common causes of workplace absence and unlikely to attract a CIC payout.
In an ideal world, everybody would have both types of cover – a CIC lump sum to clear outstanding debts and income protection to cover ongoing expenses. Unfortunately, most clients either can't or won't stump up.
Nick Kirwan says choosing between the two is complex. “The policies are complementary rather than in competition. Income protection helps tide you over through what will hopefully be a temporary illness and CIC can help you cope with a change of lifestyle. Where a choice has to be made, this really demonstrates the value of independent financial advice.”
The temptation is to sell CIC, which is simple for advisers to explain and clients to understand. “As with life cover, you can explain what CIC does in one sentence. If the client suffers one of these illnesses, they will get a lump sum to clear their mortgage, simple as that. People can relate to that. They don't like buying things they don't understand and income protection is more complex to explain.”
Patrick Bunton, broker at London & Country Mortgages, ranks CIC third in the protection pecking order. “The normal order of priorities is protection against death, then income loss and finally critical illness. We see CIC as the icing on the cake, with the lump sum helping to ensure that recuperation is not held back by financial worries. One of the barriers to CIC is cost, as it is the most expensive of the three.”
Some in the industry are concerned that the rapid growth of mortgage-related CIC has left many homeowners exposed. Protecting the mortgage simply isn't enough, says Heather Armstrong, head of marketing at Scottish Equitable Protect. The average family spends £2,154 a month, of which just one-third goes on the mortgage payment, according to figures published in June by Scottish Equitable.
Yet 95% of the UK working population has failed to cover their income properly, according to figures from GE Frankona Re. “The mortgage is not the only type of personal debt – the average family pays £113 on personal loans and credit cards each month. Intermediaries should be looking more at income protection, to protect all family expenditure.”
Rosalind Pearson, research and planning manager for insurer Swiss Life, argues that CIC and income protection should be taken out together, even if it means lower levels of cover for each. “It clearly isn't enough to take out CIC to cover the mortgage – people still need to live. The two products are complementary and a lower level of benefit should be taken out initially, then increased when affordable.”
She says many IFAs may focus on CIC at the expense of income protection, because it is an easier sell. “A lump sum to clear your mortgage is a very strong sales message – the figures can look very attractive. Most people also know somebody who has suffered a serious illness.”
Last year, insurer Liverpool Victoria launched a new product designed to address the dilemma of whether to buy CIC or income protection. Its MIMI plan will either clear the policyholder's mortgage in case of death or critical illness, or meet monthly payments if they cannot work following sickness, accident or redundancy.
Once a CIC payout has been made, income protection cannot be paid. This aims to strip out any overlap between the protection policies and may cut income protection premiums by up to 25%.
Andrew Grassick, consultant with Momentum Financial Services, says if the client asked to prioritise, income protection comes first. “This can support their lifestyle in the long run, but check first whether they have income protection from their workplace.”
He says several other factors should be considered before recommending a CIC policy. “If the client is the prime earner and their income would stop on illness, cover is vital, but first examine their overall assets. If they have investments, pension income or property that could be liquidated to repay outstanding debts, they may not need CIC at all.”
Some may not need cover for the full value of their mortgage. “Joint applicants on roughly similar incomes sometimes arrange CIC for half the mortgage debt, assuming their partner can service the other half.”
His favoured insurers are Norwich Union, Standard Life and Swiss Life. “We base our choice on premium levels, size of company and quality of service and administration. Others may have cheaper premiums but this is not the sole reason for choosing a CIC provider.”
A key factor when choosing a policy is the number of conditions covered. Nobody wants to face a client suffering from a serious condition that was excluded from their policy, says Steve Buttercase. He warns intermediaries to watch out for unnecessary exclusions in the small print. “Some policies won't cover Alzheimer's beyond age 60, which is crazy because that is much more likely to kick in later. Others don't cover deafness and blindness.”
When CIC was first introduced, policies covered just six or seven core conditions such as cancer, heart attack, kidney failure and stroke. More illnesses have steadily been covered, some obscure but worthwhile, others flashy and headline-grabbing. “When mad cow disease was in the news, some companies made big play of covering CJD, although the statistical likelihood of claiming was minimal. Don't be distracted by eye-catching gimmicks,” he says.
Insurers have been racing to add new illnesses. Skandia Protect claims to be the first to cover cardiomyopathy and supranuclear palsy. Swiss Life currently holds the coveted title for most comprehensive list of conditions covered – 38 at last count.
Yet the trend towards covering ever more conditions may soon shift into reverse, as medical developments put the original CIC concept under increasing pressure.
A heart attack that would have been life threatening a few years ago, for example, may now be treated by balloon angioplasty. The client could spend less than 24 hours in hospital and return to work within a week, together with a nice payout from their insurer.
Conditions that may have gone unrecognised are now being diagnosed earlier and more accurately. Recovery rates are improving. Screening of diseases such as prostate cancer allows treatment long before the illness reaches the critical stage, yet a claim is still triggered. For a growing number of conditions, CIC increasingly looks more like an unwarranted windfall than an essential payout.
Roderic Rennison, financial services director for brokers Charcol, says scientific developments could force insurers to pull CIC with guaranteed premiums and the move could come swiftly. “Rates have bottomed – crunch time is coming. The incidence of claims has gone up and reinsurers are either withdrawing from the guaranteed CIC market or insisting that premium rates rise. We will see significant changes in the next 12-15 months.”
Swiss Re has already indicated it may refuse to back guaranteed premiums and other reinsurers could follow. Diane Saunders, an independent financial adviser in Leeds, says this means anybody wanting guaranteed CIC should act fast. Within 12 months it could be too late. “Guaranteed contracts should lock in premium rates and conditions covered – although you never know. Renewable contracts could remove certain illnesses at a later date.”
The process of redefining illnesses has already started. In May, the ABI working party on CIC revised the definition of prostate cancer in its statement of best practice to ensure CIC remains affordable following the Prostate Cancer Management Programme. It also produced a new heart-attack definition to reflect the increasing use of troponin test in the diagnosis and treatment of heart attacks.
Following the revisions, Scottish Provident wrote to advisers in July to say it will alter its prostate cancer definition within the next 12 months. The condition will have to advance to a certain level before a claim is triggered. The insurer said it was unlikely to apply a retrospective change to policies sold with the original cancer definition, but it hasn't ruled that option out. Its new heart attack definition will apply to all new and existing cases.
Similar revisions will come in future, as CIC continually evolves to keep pace with science.
CIC has drawn regular flak for paying the same size of lump sum regardless of the severity of illness. In March, UnumProvident became the first insurer to tackle these criticisms head on. Its new product, Elixia 123, is the first policy in the UK to link level of CIC benefits to severity of illness.
Elixia 123 groups critical illnesses into three levels of severity, with clients choosing according to their pocket and priorities. Category 1 contains life-threatening illnesses such as severe heart attack and stroke, life-threatening cancer and major organ transplants, category 2 includes Alzheimer's, Parkinson's, blindness and multiple sclerosis, while category 3 covers events such as angioplasty and minor heart attacks, cancer and stroke.
Clients can receive a full payout on all illnesses in any category in the traditional way, or they can pick and choose, for example, taking full cover for category 2 conditions, but a reduced payout for conditions in category 3. They may claim just once in each category but may still claim for an illness in another category, meaning three claims could be made in total.
“Customers only pay for cover they really want, which can cut premiums by 30% and, in some cases, by 50%,” says marketing director Eugene McCormack. “The policy's inclusive approach and unbeatable premiums allows Unum to bring CIC to many more customers.”
He admits this radical approach may take time to win converts among intermediaries but says many have welcomed Elixia 123 for facing up to the challenges facing CIC. “Sometimes it is easier for IFAs to sell a comfortable and familiar product. When someone shakes up the design they have to stop in their tracks to analyse the new product structure and how it fits in with their clients' needs. This doesn't happen overnight.”
The danger is that this may complicate the simplicity of the CIC proposition. “Elixia 123 does add a tier of complexity but we have worked hard to keep the product as simple as possible. It plays to intermediaries' strengths, allowing them to tailor the policy to their clients.”
McCormack insists that the industry cannot afford to duck the challenges. “CIC product innovation has developed almost exclusively around offering new illnesses, some of which are no longer critical. Balloon angioplasty is barely more traumatic than a trip to the dentist but can trigger a legitimate claim for £100,000. CIC cannot survive financially if this continues. Reinsurers know that and so do many of the big players.”
He believes the message will filter through to the public. “Consumers aren't looking for a windfall but a financial product that will protect them if they suffer a serious illness.”
McCormack says it will take time for other providers to follow Unum's lead. “We are relatively new to the individual market, which means we don't have an existing book to protect or the millstone of an existing product around our neck. This gives us the freedom to innovate, but others may not be so flexible.”
So will rival insurers rise to the challenge? Roger Edwards, head of products at Scottish Life new protection business, says they should. “CIC can pay out £200,000 for a minor heart attack or one that nearly kills you, which can't be right. Unum has taken a brave step and produced a product that works, but it does make CIC more complex.”
This complexity also poses a challenge to the intermediary, who will have to discuss how much cover their client needs for a particular illness. They won't be flavour of the month if their client's form of cancer only merits a category 3 payout. Effective communication of any decision is essential.
Other CIC product innovations include 10-year rolling cover from Skandia Protect, with an option to renew without providing further medical information. Scottish Equitable Protect has introduced direct access to underwriters, allowing intermediaries to discuss directly whether a client with a particular health problem is likely to be refused cover.
Selecting a CIC provider involves shifting through a growing range of policy options. Norwich Union, Scottish Provident and Swiss Life offer family income benefit as an alternative to the lump sum payout. Scottish Equitable, Skandia Protect and Swiss Life offer buyback on accelerated CIC – giving the policyholder the right to buy cover if they survive for 12 months after a critical illness claim.
Ask your chosen insurer what happens if your client changes job – some allow cover to continue on the same terms while others reserve the right to raise premiums if they have moved to a more risky occupation.
The ABI statement of best practice has made comparing policies easier, but standard definitions may still vary with the insurer, notably for total permanent disability (TPD). This operates as a sweep-up clause in CIC policies, covering any seriously debilitating illness that falls outside the listed conditions.
Kevin Carr, senior adviser at brokers Lifesearch, says insurers typically offer two definitions of TPD – ability to return to work in your own occupation, or any occupation at all. The first is by far the most attractive. “Your client can be seriously ill, but as long as you can sit at home and lick stamps, your claim may be refused on the any-occupation definition.”
When selecting a policy, price is his first consideration, followed by number of conditions covered, then whether the insurer operates an own-occupation definition.
“Standard Life is my preferred provider – they are rarely first on price but are usually in the top five. Norwich Union and Legal & General have been the most competitive on price over the last 18 months. Scottish Equitable covers more than 30 conditions, while Scottish Provident also covers a good spread.”
Survival period before a claim is paid is also important. CIC is not life insurance, so insurers won't pay out if the policyholder dies immediately. Survival periods before a claim is paid typically range from 14 to 28 days. “With a 28-day policy, your client could die three-and-a-half weeks after a heart attack and there will be no payout. The shorter the survival period, the better.”
This problem is easily solved by joint life and critical illness cover. Either way, the client gets the payout. “Wherever possible, I sell joint life and CIC policies as they are only slightly more expensive than stand-alone cover,” says Carr.
Cheapest stand-alone CIC for a non-smoking male age 35 is currently £29.60 a month from Scottish Provident. This premium would buy level term CIC worth £100,000 over 25 years. Adding life cover to the policy would increase the premium to just £32.18.
A man aged 45 would pay £70.64 for stand-alone CIC, but £79 for joint cover from Liverpool Victoria. Female clients, whose life expectancy is higher, will find the extra cost of life cover is negligible. A 45 year-old would pay £65 for stand-alone CIC and just £66.80 if she added life cover.
Carr says CIC shows the value of homeowners purchasing cover after talking to an independent financial adviser. Someone who buys mortgage-related CIC through an adviser is likely to get a much better deal than one who simply ticks the box for cover offered by their bank or building society.
Premiums charged and conditions covered are generally inferior. “Nationwide prides itself on its mutual status and claims to treat members fairly but its CIC policy is very poor, covering just 10 conditions. Alliance & Leicester is even worse, covering just eight conditions. I believe a comprehensive policy should cover at least 25 conditions. To make matters worse, many high-street lenders then charge over the odds for cover.”
The most competitive rate for a non-smoking male aged 35 wanting £100,000 cover for 25 years is currently £32.18, from Scottish Provident. Alliance & Leicester and Nationwide both charge more than £45.
A 45-year-old non-smoking male would pay £83 for £100,000 cover for Swiss Life's generous list of conditions, but £111 with Nationwide and £114 with Alliance & Leicester. “The more you pay in life the more you get, but this isn't the case with CIC. The high street tends to charge half as much again and covers less than one-third the number of conditions. This really demonstrates how advisers can add value for the client,” Carr says.
The rapid growth of CIC sales bears testimony to the attractive simplicity of the product. However, this simplicity may have to be sacrificed before continuing medical advances make premiums spiral out of control. This may make CIC a more complicated sale for the intermediary, but hopefully still a rewarding one.
Scottish Provident's claims figures for critical illness cover New claims figures published last month by Scottish Provident clearly show that the health of our nation cannot be ignored.
We all know that life expectancy for a man is lower than it is for a woman. However, it is interesting to see from the claims history that the extra years enjoyed by females might not always see them in good health – women on average claim on their critical illness policies at the age of 41, which is three years younger than men at 44.
The most common cause of illness claimed by males and females are similar, but the incidence rates differ greatly. The table below shows the percentage of claims made for each illness:
Men on average are more likely to be better insured than women are – the average sum assured for a man is £69,893, whereas for a woman it is £57,546.
Nick Kirwan, head of marketing and product development at Scottish Provident, says: “The lower average sum assured for women could be a warning that they are underinsured, leaving themselves open to financial hardship if they fall seriously ill. It is up to us as an industry to get the message across that everyone, particularly women, needs to make sure that they have adequate financial protection in place.”
There is no way of telling when or if a critical illness is likely to strike, but there is a positive side to the claims history. Those people that have been struck down by illness and have had the foresight to take out financial protection have one less thing to worry about during what will be a very distressing time.
There are some marked changes in the number of people that are claiming against illness compared to previous claims data and also some other interesting data.
Heart attack, cancer and stroke have always been the three main illnesses claimed for. Last year saw multiple sclerosis (MS) creeping in to make this 'big three' the 'big four'. MS is now the second most common reason for claims in women, now standing at more than double the number of stroke claims.
Cancer claims account for 54% on all of the claims made. The most common cancer being claimed for by women is breast cancer, with an average age at claim of just 41. These figures reflect national statistics, which show that there are over 39,000 cases of newly diagnosed breast cancer a year in the UK.
Lung cancer claims have risen in the past year. This is consistent with national statistics showing it to be the most common cancer in men and the third most common in women.
Kirwan adds: “Sharing our claims history is a very useful tool to financial advisers. It reassures the consumer that companies pay out on claims and don't hide behind small print, while reinforcing the adviser's message on the need for insurance.
“As a leading provider of financial protection it is our aim to ensure that people know they can depend on us to pay out on all valid claims. The industry as a whole wants to pay claims, which is why we have set up these plans in the first place. To prove this to the consumer we have adopted the philosophy that we 'say what we mean and mean what we say'.”
ABI revised statement of best practice for critical illness cover The Association of British Insurers published a revised statement of best practice for critical illness cover earlier this year after extensive consultation within the industry and outside.
Nick Kirwan, chairman of the ABI's critical illness working party, says: “We have consulted widely about these changes with bodies and individuals both inside and outside the industry. I am pleased that we have achieved overwhelming support for the changes. These will benefit consumers by ensuring that policies are up to date with medical science and that cover should remain affordable.
“Since the original ABI statement was published in May 1999, critical illness cover has really come of age. The market has more than doubled in size in the past three years. We estimate that critical illness policies now cover about six million adults as well as around two million children.
“One of the key drivers of growth in the market has been the strong housing market. But the additional clarity provided by the statement of best practice has also given the market a welcome boost.”
The statement of best practice for critical illness cover aims to help consumers understand and compare critical illness policies by standardising:
The description of critical illness cover in key features documents The use of standard generic terms
The use of model wordings for core and additional conditions and model exclusions Revisions
The agreed revisions to the statement are:
A new cancer definition to ensure that critical illness cover remains affordable in the light of the government's prostate cancer management programme A new heart-attack definition to reflect the increasing use of troponin tests in the diagnosis and treatment of heart attacks An improvement to the way critical illness cover is described in key features documents to improve clarity Implementation deadline
Compliance with the statement is a condition of membership of ABI. Insurers will be required to adopt the changes as soon as is practical, but must do so by no later than the end of May 2003.
A consumer leaflet A Guide to Critical Illness Cover has been updated and is available on the ABI website www.abi.org.uk. It retains its plain-English campaign 'Crystal Mark'.
What they say
Nick Kirwan, head of product development and marketing, Scottish Provident “The flexibility of menu-based protection plans allows homeowners to tailor cover to their needs. They could, for example, protect their mortgage with life and CIC on a reducing term, then buy level term protection to meet their other outgoings.”
Steve Buttercase, IFA, Lamensdorf Group “People know exactly how much mortgage debt they have and like the fact that it will be paid off if they fall ill. Unlike life cover, they get a payout without having to die for it.”
Paul Banfield, partner and senior financial adviser, Best Advice Financial Planning “CIC is as important, if not more important, as life cover. Intermediaries have been very focussed on protecting life and have not recommended CIC as much as we should.