As Critical Illness Policies Take Root, Reinsurers Can Help Them Grow

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Critical illness insurance is well established in many markets where it continues to grow and thrive. Current estimates in the United Kingdom are that 14% of the working population has a CI policy.

Though the U.S. market has been slow to develop and were still in the early stages, the product is taking a new shape here. As the market grows, both direct writers and reinsurers must be sure to learn from the emerging wisdom of more mature markets.

In general, the CI product in the U.S. is simpler, with fewer covered events than typical products in, say, the U.K. or Canada. This makes sense in an environment where the first challenge is educating the distribution network and the public–and where most claims, even in plans covering many events, are for the “core” illnesses, anyway. Advice from other markets, especially those that have seen the perils of “my products got more stuff covered than your product,” encourages us to chart our own course in product design.

Unlike many other markets where fully guaranteed rates are common or even the norm, thus far, the “guaranteed rates” phenomenon hasnt taken hold here.

Right now, the U.K. and other markets are coping with the impact of the withdrawal by several major reinsurers of reinsurance support for rate guaranteed pricing. This means that as of January 2003, many companies in these markets can no longer offer stand-alone CI products with guaranteed rates. Where such guarantees continue to be available, they are now expected to add from 40% to more than 50% to the premium rates. We must recognize that our filing requirements will make achieving required increases challenging until a credible experience base has been developed. So, in the short term we will have to live with the pricings we file.

The reinsurance industry has played a major role in the creation and growth of the CI product in most markets because of the need for product development and pricing expertise as well as risk-sharing, on both an excess and shared-risk basis.

Some years ago, two international reinsurers effectively brought the CI product to Canada, importing expertise resident in their European markets and bringing a number of significant Canadian insurance companies into the CI market, which is now well established and continues to grow.

Here in the U.S., we at Optimum Re find that due to scarce resources, many companies could not invest in development of a CI product, even when they see great opportunity, without the resources, guidance and support of a reinsurer.

One thing that many here are not aware of is the continued proliferation of so-called “acceleration” CI products in other markets. One U.K. company told me recently that more than 75% of their CI business is on an acceleration basis, a combination CI and life policy where the event that first occurs triggers the payout of the full face amount. Could this be problematic?

Potentially yes, should the CI pay first leaving the insured uninsurable and with no other life insurance. Or not, when the product is sold, as it often is in the U.K., as decreasing term insurance to cover a mortgage obligation. In that case, the product has the desired effect–the mortgage disappears.

At this point in the U.S., most products do not require the insured to survive for a prescribed period of time following diagnosis in order to qualify to claim, while a “survival period” requirement exists on almost every CI product elsewhere.

Survival periods make sense when the CI product is sold attached to life insurance but as a stand-alone product, most U.S. companies have backed away from the potential bad pressor even litigation–that could follow a claim denial when an insured dies just before the expiration of the survival period, leaving big hospital bills and financial hardship for the family.

Reinsurers and insurers share the need to watch emerging trends in order to understand the potential for medical innovations to impact the product. The action taken recently by the reinsurers that withdrew their support of guaranteed rates was described to me as precipitated by two thingsthe potential for medical advances to change the nature of the risk and by sensitivity to potential litigation.

Take the definition of an eligible event. Currently many covered events are defined in terms of normal medical diagnostic practices. What happens if new technologies replace old and make it easier to detect a covered event, potentially allowing more eligible claims?

Some estimates by reinsurers assess a 10% to 15% additional claim cost of amending the heart attack definition to use troponine, an enzyme indicating a heart attack, as the definitive enzyme. What should happen when old diagnostic standards used in the policy to define the covered event are replaced by new practices? There continues to be serious discussion in other markets about the need for “reviewable” definitions.

The product has been criticized for the potential “windfall” nature of the benefit. Indeed, current issues in other markets center around the growing disconnect between genuine need and the claim trigger.

This has led to some attempts to move the product toward severity or impairment-based benefits and introduction of varying levels of benefit. Our products have already accomplished some marrying of trigger and payment by covering procedures like coronary artery by-pass and angioplasty at a relatively small percentage of the face amount.

Taking this further, some CI medical consultants discourage coverage of any surgical procedures. The rationale? This “recovery” product should cover things that leave some impairment requiring recovery over time. Procedures, after all, make you better.

So where is the product heading? Critical illness insurance will continue to satisfy real need. It will necessarily continue to evolve as medical advances and emerging experience dictate.

The U.S. market will have products unique to our needs but crafted with wisdom gained from other markets and from reinsurers dedicated to the future of the product.

Consider this: U.S. market penetration at current U.K. level would represent more than 18 million policies!

is vice president, critical illness marketing for Optimum Re in Dallas. She can be reached at sheila.matheson@optimumre.com.


Reproduced from National Underwriter Edition, February 17, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.