Critical illness cover is inching its way up the corporate agenda. Edmund Tirbutt finds the product being used to soften the blow when benefits are removed elsewhere
Critical illness cover may have traditionally been the poor relation to life cover and income protection in the group risk arena, but the last few years have seen the product make steady progress despite the backdrop of the current economic downturn.
According to Swiss Re’s annual Group Watch survey, annual premium for group critical illness cover increased from £34.8 million in 2006 to £50.2 million in 2010. Ron Wheatcroft, technical manager at Swiss Re Life & Health suspects that the Group Watch 2012 survey due to be published this April will show “more of the same.”
Wheatcroft says: “We are seeing quite a bit of interest in the product, particularly within flex. Some companies find it hard to differentiate between what is and isn’t flex in their data but flex could account for as much as two thirds of the market. Critical illness cover is a very emotive sale as people realise they might get conditions like cancer, and I don’t feel the fact that it doesn’t protect for life is an issue. Employers offering it are seen to be doing the right thing and are not creating contractual liabilities for themselves as with income protection.”
A number of providers and intermediaries in fact observe a particular pick-up in sales during recent months. Aviva UK Health, which only entered the group critical illness market in March 2010, reports new business to have outperformed expectations and quote activity to be very strong. Ellipse, which entered in 2009, and Legal & General also volunteer increased interest.
Peter Fenner, spokesperson for Ellipse, says: “The impression we get is that some companies are looking to cut back by switching from a whole-hog group income protection scheme to a limited benefit one and are thinking of softening the blow by including critical illness cover. They are still in the process of considering this and are getting quotes for various permutations.”
Premier Choice Employee Benefits, reports an increase in employers using critical illness cover to help plug the gap created by income protection scheme deferred periods because they realise that someone may be back at work within six or eight weeks after having something like a heart attack but that critical illness cover can take away some of the financial pressure (see Box).
Lorica Employee Benefits hasn’t seen a significant surge in demand for employer-paid critical illness cover but reports good growth in take-up rates in flex schemes – from around 7 per cent to 8 per cent on average 18 months ago to 10 per cent or 11 per cent now.
Nevertheless, it is notable that none of these bullish organisations feels that the group critical illness field has reached a take-off point that is going to result in a massive and sustained increase in sales.
Steve Bridger, head of group risk at Aviva UK Health, says: “There are some worthwhile opportunities in the market but, whilst flex business is growing, we are not seeing people sitting on a load of disposable income. We therefore don’t expect any significant pick-up until the economic recovery gets underway, so we could be talking about a long time.”
John Russell Smith, client director at Lorica Employee Benefits, says: “I can’t see it really taking off in the near future. If one in two people were going to buy critical illness cover it would have happened by now. Company-paid cover isn’t on companies’ radars at present and, even when we come out of the downturn, employers aren’t going to suddenly splash more money around. But they are happy to give employees choice.”
Those who do envisage a much rosier future are either talking about many years ahead or about a significantly changed product. Paul Avis, sales and marketing director at Canada Life, thinks that 2016 will be a good year for group critical illness cover as employers once again scrabble for talent in the post auto-enrolment era. Katharine Moxham, spokesperson for Group Risk Development (Grid), envisages a valuable alternative funding mechanism for cancer claims.
Moxham says: “We are going to see employers looking at group critical illness cover as a way of transferring the inflationary premium risk under private medical insurance (PMI) from their own pockets to their employees’ pockets, and we could see a completely new product that only covers cancer. Additionally, if they were able to make it a compulsory company-paid cover then they would hopefully be able to remove the P11D liability because one of the recommendations in the government’s recent review of sickness absence is to remove tax charges from rehab treatments.”
“We have come across cases of newish clients we didn’t arrange cover for claiming under critical illness cover when they actually needed income protection”
But most commentators do not consider the fact that company-paid group critical illness cover constitutes a P11D liability to be a major barrier to sales. They point out that the tax is cancelled out in flex by employees using salary sacrifice and, even outside flex, the tax charge on an average premium of around £15 a month is relatively small.
Possibly greater turn-offs are the facts that pre-existing conditions are excluded and that the product is no longer quite as simple to understand as it used to be. Insurers are increasingly incorporating added-value features. For example, Canada Life includes the Best Doctors and RED ARC services and Friends Life includes Best Doctors and a 24 hour nurse helpline.
Furthermore, there has been a ’conditions race’ developing. In January 2011 Canada Life increased the number of conditions on its core cover from seven to 12 and the number on its enhanced cover from 26 to 39. In July 2011 Friends Life increased its enhanced cover from 33 to 37 conditions whilst revamping the old Bupa product, and in November 2011 Legal & General increased the number of conditions on its enhanced cover from 33 to 38.
In view of the fact that most critical illness claims come from only a handful of illnesses, some feel the new additions are providing more confusion than benefit. At Legal & General, for example, over 95 per cent of claims come from heart attack, stroke and cancer, and its new covers don’t exactly roll off the average consumer’s tongue. They include bacterial meningitis, aplastic anaemia, cardiomyopathy and encephalitis!
Chris Ford, director of group risk at Jelf Employee Benefits, says: “Confusion is coming from the fact that insurers are competing on added extras which are likely to produce very few claims. Some direct buying employers are actually buying critical illness cover thinking that it’s income protection.
“We have come across cases of newish clients we didn’t arrange cover for claiming under critical illness cover when they actually needed income protection.”
For this reason some providers are currently working hard to implement effective communications plans to ensure that scheme members know what they are covered for. Legal & General has revamped its product literature to provide easy-to-understand definitions and Canada Life is placing great emphasis on using innovative interactive media.
Nevertheless, the single biggest barrier to sales is generally considered to be the lack of incentive for employers to offer the product other than for recruitment and retention purposes. This contrasts notably with group income protection, where early intervention and rehabilitation services can greatly assist with reducing absenteeism. Unum is currently looking at ways of engaging the employer more, and one of the options it is considering is a critical illness version of the Dual Benefit approach that it already offers for income protection – which splits claims benefit between the employer and the employee and therefore effectively doubles up as a form of key person cover.
But headwinds for the product remain. Indeed, Zurich Corporate Risk, which started providing group life and income protection in 2009, still has no plans to offer group critical illness. That said, creative thinking from providers could move the market forward.
Critical illness payout aids recovery
Being a senior corporate risk and healthcare specialist with AWD Chase de Vere made 45-year-old Matthew Hurst highly aware of the advantages of critical illness cover.
Furthermore, his father had suffered a major stroke in his late 40’s and his mother had undergone a triple heart bypass in her late 50’s. So it was hardly surprising that Mathew took out voluntary cover via his company’s flex scheme.
In November 2009 his foresight was strongly vindicated when he had a heart attack in the office. After having had a stent inserted in one of his arteries he was back to work within three months and enjoyed full pay during his absence. Nevertheless, the £90,000 lump sum critical illness pay-out he received greatly helped his recuperation.
It enabled him to have a two week holiday in Canada with his wife, to pay-off some of his mortgage and clear off other bank loans.
Matthew says: “My heart attack related just as much to lifestyle and stress as it did to general health, and not having to worry about saving for a holiday or having to pay off loans made my life a little more stress-free. I was able to return to work with a clean slate.”