The UK’s much-publicised ‘protection gap’ continues to grow, despite the best efforts of both providers and advisers to ensure consumers have adequate levels of cover in place to protect against life’s uncertainties.
Critical illness cover, in particular, fulfils an important need for those without a significant financial buffer to fall back on, as it provides a cash lump sum on diagnosis of a serious illness covered by the policy terms. However, CIC is often overlooked by consumers, even though the expenses that illnesses can bring are significant. Average expenses for most cancer sufferers, for example, can climb to £570 a month, according to Macmillan Cancer Support.
Figures like these are no secret, and households are clearly not oblivious to the risk they are taking. Almost half (45 per cent) in a recent survey of more than 5,000 people knew someone who had suffered a serious illness or injury. Yet, according to YouGov, just 7 per cent have CIC – compared with 23 per cent for life insurance – despite the fact that critical illness policyholders are six times more likely to claim.
To add to these concerns, home loans are increasing and survival rates for serious illnesses are continuing to improve. Clearly there are going to be many people who may find themselves underinsured at a time when they most need to focus on their health and not any financial burdens.
Yet there seems to be a range of barriers standing in the way of a greater take-up of CIC. First, the price, which reflects the greater probability of a claim compared to life insurance. So, too, is the perception that the policy will not pay out when needed – even though the statistics tell a very different story. According to the Association of British Insurers, the average pay-out rate on CIC policies last year was 92 per cent, and Legal & General alone has paid more than £1bn in CIC and terminal illness claims since 2008. Finally, fewer advisers now specialise in protection insurance than in the past, with more now focusing on wealth management.
However, providing cover – and with it, peace of mind – is a challenge that the industry needs to engage with. The main way that we can do so is to strive for greater simplicity in the wording and definitions of CIC policies.
First, there is a lot more that the industry can and should be doing in terms of both financial education and marketing. Efforts to avoid jargon, promote the use of plain English in product literature and develop public understanding of protection products should be actively encouraged. There may even be an argument for the government to incentivise public take-up of protection products, particularly among working families.
Complex policy wordings create a steeper learning curve for advisers, while a lack of clarity limits the scope for any further downward trend in unsuccessful claim rates. At the same time, widening cover to include more – and sometimes poorly-understood – conditions presents difficulties for competitive pricing. Furthermore, and at the most basic level, clients are less likely to trust and to buy what they do not understand.
None of this is news. The ABI’s model wordings for CIC conditions were introduced in 1999, precisely to standardise CIC cover and eliminate confusion. However, the drive to add to the number of conditions covered by CIC policies and to market products as offering enhanced “ABI+” cover has meant this has largely failed to deliver the levels of cover needed. The ABI’s 2011 CIC Statement of Best Practice includes definitions for 23 conditions; the average policy now covers closer to 50.
Of course, some changes over the past couple of decades should be welcomed. The fall in unsuccessful claims that we have seen must be, in part, due to terms that are less restrictive. Furthermore, some additions to these policies have met previously unanswered needs. The increase in cover for policyholders’ children, for example, offers genuine value, with children’s cover representing the fifth most common type of claim.
Likewise, partial payments, which allow for a proportion of the sum insured to be paid out for less serious conditions, can only boost the standing of the product, even if they do add marginally to its complexity.
However, the fact remains that the vast majority of claims are attributable to a small number of conditions. Cancer alone accounted for 58.9 per cent of Legal & General’s claims in 2013; heart attacks 11.8 per cent; and stroke 8.7 per cent. Not surprisingly, all three conditions must be covered for a policy to meet the ABI standards.
Add multiple sclerosis, and over 80 per cent of claims result from just four conditions. Similar figures are found industry-wide. This should help put the competition between insurers to add to the list of conditions covered in context. In most cases, the additions result in few – if any – successful claims.
Breast cancer affects one in eight women. There are about 175,000 heart attacks in the UK each year. Someone suffers a stroke every three and a half minutes: these are the risks that are worrying the people who are looking at CIC policies. Long-winded definitions and exemptions in wordings around these major risks undermine confidence in the cover. This is where attention should focus.
Instead of extending cover to conditions few have heard of, insurers need to focus on improving cover for these key conditions. For some, this means paying out on diagnosis of a heart attack, regardless of troponin levels that measure the severity; it means removing exclusions for early stage chronic lymphocytic leukaemia; and it means no longer insisting that the neurological deficit (such as loss of speech) brought on by a stroke is permanent. In short, those diagnosed with cancer, a heart attack or stroke are now more likely to be paid.
The evidence is that this is what advisers want. When asked by researchers Defaqto in 2010 whether they would prefer CIC products with improved definitions or with additional conditions, 72 per cent opted for the former. It is also what buyers want; asked by reinsurer Hannover Re UK what would most help them to buy an insurance product like critical illness, the top two answers were “a clearer understanding of what the policy covers” and “an easy to understand product and company information without any jargon”.
A commitment to simplicity would bring a number of advantages. Removing the exemption for permanent impairment means that stroke sufferers can be paid more quickly, for example; focusing on the conditions that affect most people (and on which we have the most data) makes it easier to provide fair, competitive pricing; and improved clarity and widening cover reduces the incidence of ineligible claims.
Most importantly, however, making definitions simpler means we can bring them closer to what buyers understand the terms to mean, and provide the cover they expect. Ultimately, this is the best way to build confidence in CIC, and increase its penetration at a time when the need for it is clear to see.
Mark Holweger is managing director (intermediated) of Legal & General Insurance
Key points
■ Critical illness cover is often overlooked by consumers.
■ There is a lot more that the industry should be doing in terms of both financial education and marketing to attract more clients.
■ 80 per cent of CIC claims result from just four conditions.
