Exclusion confusion

Critical illness cover needs careful communication to keep the shock of exclusion to an absolute minimum says Edmund Tirbutt

Critical illness cover may not be the biggest-selling product in the group risk stable but some believe it punches above its weight in terms of reputational damage to the industry. When employees do not realise they might be excluded until the point of claim, as most schemes use exclusions for pre-existing conditions rather than carry out underwriting at outset, accusations of taking punters’ cash without knowing whether they are eligible for a product have been levelled at the product. It is an issue that affects both company-paid and flex/voluntary cover.

One school of thought maintains that this problem could be greatly reduced by effective communication and that intermediaries who express such concerns should perhaps be considering whether they may have become too commoditised to fulfil the educational role necessary. Ideally they should have a number of different communication methods up their sleeve to enable them to take a multi-layered approach.

If a young IT-literate workforce is involved, the best way to communicate may be online as they are likely to engage if presented with a couple of questions. Other employees, particularly older ones, may expect a letter posted to their home that clearly spells out the issues. A further category will prefer to have things explained verbally at a seminar but this should be merely one part of a session focusing on employee benefits as a whole – to which employees are invited to ‘come and look at what we are spending on you.’          

Friends Life director of group protection David Williams says: “Communication is key to all of this, so advisers and insurers need to provide employers with all the necessary support. I have no problems with pre-existing condition exclusions as long as they are properly communicated, together with associated condition exclusions, which most providers waive after a couple of years but for which the terms are not consistent. It can, for example, be for two years from when they take out cover or two years from when they last had the condition.

“People can still be declined for non-disclosure at the claims stage even if they have been fully underwritten, and pre-existing condition exclusions benefit all parties through ease of administration. Underwriting costs are reduced and employees can be on risk straight away and can increase cover in the flex window or in response to lifestyle events without any admin issues.”

Portus Consulting director of consulting David Dolding recommends those offering critical illness cover via flex to ask employees to tick a box saying that they have understood the pre-existing condition exclusion, because this will at least provide an audit trail. Whilst he acknowledges that there will always be an issue about pre-existing conditions for company-paid cover, he is adamant that this would never stop him mentioning the product as an option.

He says: “We have had a client with a critical illness claim declined for this reason and it did cause quite a bit of work for us having to explain things to both the client and individual. But at the end of the day the client was very complimentary about the way we explained the matter and fully supportive of the fact that the claim wasn’t covered.”

Unum has responded to criticisms in the market about underwriting at the point of claim by offering the chance to take cover of up to £10,000 via its Select product without pre-existing conditions being excluded. But Andrew Potterton, the company’s head of proposition development, acknowledges that the innovation “Hasn’t been as popular as we would have hoped.”

Ellipse is more positive about the unusual facility it offers for critical illness scheme members to be underwritten at outset – made possible by its advanced online underwriting.

Ellipse spokesman Peter Fenner says: “We actually recommend that new scheme members are underwritten at outset. Existing schemes, however, can be better off sticking with pre-existing condition exclusions if related condition exclusions have ceased to apply after two years. We allow schemes to receive quotes for underwritten terms and then decide whether to switch or not. Some have switched but it’s not always a straightforward choice.”

It is possible that other insurers could follow Ellipse’s example if they come up with the technology to enable online underwriting to be done with a sufficiently small unit cost. But, even if this happens, there will be many employers who don’t want to have to deal with handling exclusions, loadings and declinatures.

Williams says: “Historically we have offered full underwriting on group critical illness cover but we stopped doing it at the end of the last decade as employers didn’t want lots of different premium rates for individuals. They wanted one rate for everyone or age-banded rates, so there was very little demand.”

If communication focuses on what is covered as opposed to simply what isn’t covered, the positives of the product may well be considered to outweigh the problems posed by pre-existing condition exclusions and other barriers. Nevertheless, with economic recovery likely to be gradual, group critical illness cover is only unlikely to start experiencing anything more than steady growth if a bandwagon starts rolling in the direction of the product fulfilling a new purpose.

Group Risk Development spokesperson Katharine Moxham says: “October 2013 Grid employer research shows that 46.2 per cent of employers would support auto-enrolment for group critical illness cover alongside pensions. It’s also quite possible that group critical illness cover could be used in the next shift of open-ended risk from employer to employee by, for example, removing cancer cover from company-paid private medical insurance but offering voluntary critical illness cover with no P11D liability to fill the gap.”

Although group critical illness cover has been enjoying steady growth during recent years, its premium income figures remain dwarfed by those for both group life and group income protection (see Box). Furthermore, according to Swiss Re, 61.4 per cent of the critical illness premium that does exist is accounted for by flex schemes. 

Aviva didn’t even launch a group critical illness proposition until 2010 and Zurich Corporate Risk, which entered the group risk market as a whole in 2009, still doesn’t offer one. 

Zurich Corporate Risk group risk proposition manager Nick Homer says: “When we looked at the group risk market before launch it didn’t seem an important enough business proposition for our early stages. We are not against the product in principle and it definitely figures in our longer-term thinking but we have no firm plans to offer it at present. We currently just see group life and income protection as bigger opportunities.”

Group critical illness cover can be obtained relatively inexpensively, with cover for one times salary typically costing around 0.25 per cent of payroll, but employers invariably regard income protection as better value.

The ability of income protection to provide early intervention and rehabilitation services means that there is much more in it for the employer. The fact that critical illness cover pays a lump sum to claimants also creates a risk that they could become financially secure enough to give up work – or at least temporarily step off the treadmill and consider a career change.               

Although over 90 per cent of Gallagher Employee Benefits’ flex clients have critical illness cover, under 1 per cent of its 450 group risk clients have the company-paid version, because they feel income protection is more aligned to their interests.

Gallagher Employee Benefits chief executive Tim Johnson says: “When firms opt for company-paid critical illness it’s virtually always because they don’t want income protection but want to offer some other form of health benefit instead. Three of our four company-paid critical illness clients are media firms with young staff who they are unlikely to employ for more than three years, so they feel a product like income protection which pays out for life is not relevant.”

A traditional criticism thrown at group critical illness cover is that, when company-paid, it gives rise to a P11D liability for employees. But this reservation is perhaps a little outdated in view of the high proportion of flex/voluntary cover – which doesn’t create a P11D liability – and because there is growing anecdotal evidence that it can be possible for employers to side-step this problem, albeit at a cost.

Canada Life Group Insurance marketing director Paul Avis says: “Employers can approach their local inspector of taxes and arrange to pay a lump sum once a year instead of the employee having to pay a P11D liability.”

Johnson says: “I have come across employers agreeing with HMRC to pay the P11D tax cost themselves by grossing up. I have never had a grossing up application refused but it’s possible that the outcome could depend on the local tax office.”


Source: Swiss Re Group Watch 2013


In-force premiums, 2008-2012  (£)

                                   2008                 2009                 2010                   2011                      2012

Critical illness      45,403,103      48,393,386      590,252,281       55,005,102          59,786,364                     

Compared to

Death Benefit     945,210,629     897,285,619   918,635,231    956,074,087     1,054,578,428  

Income                648,902,366      567,971,284   517,385,394    517,995,843       563,150,820       


Number of in-force critical illness schemes, 2008-2012


     2008                  2009                   2010                 2011              2012

    2,077                2,073                   2,209               2,333               2,457                       

Total number of lives covered by critical illness schemes, 2008-2012

    2008                  2009                   2010                2011                2012

   288,551           277,396            305,678           326,045            339,073