Bucking the trend for longer lists of conditions, AIG’s new critical illness plan covers just three. But will this style of product appeal to new markets? Sam Barrett reports
Over the past few years, critical illness insurers have significantly increased the number of conditions covered on their plans, with the most comprehensive now covering more than 70 different illnesses. But, while all these additions may make cover appear more generous, it does not appear to be translating into increased sales.
According to Swiss Re’s Term & Health Watch 2016, the number of new critical illness policies, incorporating stand-alone and acceleration of life cover, decreased by 7.6 per cent in 2015 to 430,127 new policies. Given that 560,911 policies were sold just three years earlier, this marks a big slide in fortunes.
“Data shows that fewer than 10 per cent of consumers buy critical illness cover,” says Adam Winslow, chief executive of AIG Life. “The need for cover has not reduced but, with new sales figures continuing to fall, it suggests to us that consumers want something different.”
AIG’s research found there were several reasons why traditional cover was not appealing to more customers. These include the complexity of the product, with the rush to add more conditions adding to confusion and increasing the need for advice, as well as affordability, with more conditions resulting in higher premiums.
The fact that advice has become such a key part of the sales process also restricts sales. Many consumers’ first experience of financial advice is often tied up with their mortgage, and with the average first-time buyer now well into their 30s, critical illness insurance is simply not making an appearance until this point.
Simple cover
Given these reasons for snubbing cover, AIG launched its Key3 critical illness plan in August. With this, rather than add more conditions to its traditional plan, it stripped back cover to just three – cancer, heart attack and stroke.
Although this may appear to represent a huge reduction, these three conditions account for the majority of CI claims. Almost 80 per cent of the company’s adult claims in 2015 were for these conditions, broadly in line with the industry.
For instance, according to figures from CIExpert, cancer accounts for approximately 65 per cent of claims, with heart attack and stroke accounting for 12 per cent and 8 per cent, respectively.
By cutting back on the number of conditions, premiums are also smaller. With cover in place for
80 per cent of traditional claims, cost is also about 80 per cent of that of a comprehensive policy.
Available as a stand-alone plan or as an addition to life cover, it can be bought as a level plan or with a decreasing or increasing sum assured. It also includes access to Best Doctors, which can be used for up to three years after a claim, and its claims support fund, which can provide policyholders with up to £300 towards expense, such as travel, parking and physiotherapy while a claim is being processed.
Market reception
Although the plan goes against the trend for increasing cover on critical illness policies, it has been well received by advisers. Mike Aldridge, innovation director at London & Country Mortgages, says it is a positive step for the critical illness market.
“Anything that helps more people engage with protection is a good thing. It is not a substitute for comprehensive cover, but it does a good job for those consumers who would never buy the traditional product,” he adds.
The potential to break into new markets is certainly something that was recognised by AIG during product development. One of its target markets is ‘Generation Rent’, the growing number of people who, because they are not homeowners, may never have had financial advice, but still want protection. “If they want a product, they go online,” says Mr Winslow. “If it is simple and straightforward they will have the confidence to buy.”
There is also the potential for sales in the mortgage market, where the demands of the Mortgage Market Review have helped squeeze protection advice out of the sales process. By keeping the concept simple, it will be easier to introduce to consumers. The price point also helps address affordability issues.
Given these target markets, the plan could also suit direct distribution. This too is in AIG’s plans. Although it is currently selling the plan through financial advisers, Mr Winslow would consider working with partners such as aggregators and bancassurers to distribute it further.
This type of simple critical illness product already has a place in the direct market. Sun Life Direct’s Family Life Insurance, which is underwritten by Scottish Friendly, can include cover for critical illnesses. Like AIG’s plan, this covers the three main areas of claim – heart attack, stroke and cancer – but pays out 25 per cent of the sum assured in the event of a claim, with the remaining sum assured available if the policyholder dies during the term.
Sales growth
With these new, untapped markets in its view, inevitably there are concerns that the plan will simply take sales from the more comprehensive product. However, Alan Lakey, director of CIExpert, believes it is sufficiently different to carve out its own market.
“I do not believe it will take business that should have gone to a comprehensive plan,” he says. “Some advisers who already sell critical illness insurance will be nervous about recommending a plan that only covers three conditions as there is a risk someone will contract a condition such as multiple sclerosis, which is offered on a comprehensive plan. Instead, it will suit those looking for a simple-to-explain addition to stand-alone life cover.”
His view is supported by AIG’s experience with the product. Although it has only been offering Key3 for a short time, it has already seen business from advisers it has never worked with before.
There is also the potential for a simple product to be a stepping stone to more comprehensive cover. If a policyholder needs a change, for example with the addition of a mortgage or family, they might wish to broaden their cover to give themselves more protection.
A new market?
With the potential for a simple product to extend critical illness cover to a new market, opinion is divided as to whether other insurers will launch similar products.
While Mr Aldridge believes that others will follow AIG’s lead, Mr Lakey is less convinced. “There are no indications that other insurers are looking to launch a simple product but this may well change if AIG does prove successful,” he explains.
He also believes there is room for more innovation in the market. For example, he would like to see a more radical overhaul of the critical illness product.
“Rather than focus on ever-increasing lists of conditions, it would make more sense for claims to be dependent on the outcome of an illness, for example loss of motor function,” he says. “This would prevent some of the situations where, although the policyholder is seriously ill, the claim is turned down because that specific condition is not covered.”
But, while this type of development may currently be a step too far for the protection market, simpler critical illness products such as AIG’s Key3 could be the next focus for insurers’ product development. If these open up new markets for protection, sales figures could influence future developments.
