CI Insurance Update: The Market Is Poised For Growth
By Daniel R. Pisetsky
The U.S. critical illness insurance market continues to evolve with the introduction of new products and new players.
Chart 1 provides a market summary by U.S. distribution channels in May 2003. It shows there are several more players than in our last study, in March 2002 (see chart 2). As for the three core CI distribution channels, chart 3 shows how they break out.
What do the distribution channels have in common? How do they differ? Lets examine each a little closer.
Currently, in the individual distribution channel, there are three different product designs: stand-alone, accelerated and additional rider.
A stand-alone CI insurance product is built on a term-like chassis. These products usually are guaranteed renewable and can offer benefits ranging from $25,000 to more than $1 million.
The accelerated product is usually a CI product built onto a life insurance chassis. Should you purchase a $100,000 life policy with a CI rider and then be diagnosed with a critical illness, the life policy will pay you $100,000. If there is no diagnosis of a critical illness during a policyholders lifetime, the $100,000 is payable on death.
Some products embed a supplemental CI rider on a life or disability chassis. In the case of a CI life product, the supplemental rider would pay a CI benefit upon diagnosis, as well as a 100% death benefit. We are seeing products that are being built on a term life as well as a universal life insurance chassis.
Agents who are selling CI insurance are usually life and health producers. Within the individual distribution channel, disability income agents are using CI insurance as additional coverage for their high-end DI customers.
In the worksite distribution channel, there are three basic product designs. These are stand-alone, accelerated and supplemental. The products are built on either a group or individual chassis.
Agents dedicated to the worksite channel are usually specialists. They may work with third-party administrators that will provide enrollment organizations, either through onsite enrollers or automated enrollment through an intranet or Internet approach.
In the employee benefits distribution channel, CI insurance is in its infancy. Only a few carriers provide a product for group disability and group life. There are three designs: stand-alone, accelerated or a supplemental rider for an accelerated product for group life, or a rider added to group long-term disability.
In the direct marketing channel, insurers are approaching direct marketing with customized products. One such company is marketing a mortgage product designed to pay a stream of income for mortgage payments in the event of a critical illness. Other companies are targeting affinity groups and associations such as physicians and teachers.
In the so-called “new market” channels, one company has designed a mortgage CI insurance product that will pay off the entire mortgage. In addition, CI insurance products have been designed around consumer debt–loans and credit card balances. Lending institutions, as well as agents, can sell these products.
What are the major issues and concerns in the U.S. market for CI insurance? There are at least eight.
1) Conditions: All companies are offering coverage for the core conditions–life-threatening cancer, heart attack and stroke. However, variations are emerging. For example, loss of independent existence is a covered condition, and some policies use ADLs as the benefit trigger. Deciding on which conditions to use is becoming a competitive tool among carriers.
2) Pre-existing conditions: There seems to be little consistency among companies on how and when to exclude pre-existing conditions. Depending on distribution channel and target market, the provisions may include: 12 months before issue and 12 months after, or perhaps 24/24. Some companies are using the “look back” approach, going back two to 10 years in reviewing an applicants medical history.
3) Hybrid products: When CI insurance first debuted in the U.S., most products were stand-alone. Now, innovative designs are evolving. For example, CI insurance can be embedded into a term or UL chassis as an accelerated product so it can be sold as CI insurance with a death benefit. Carriers are offering a range of designs related to stand-alone, accelerated and supplemental riders.
4) Underwriting: Depending on product design and distribution channel, some applications are including questions related to height, weight and family history. Others are using the “look back” approach. Anti-selection concerns are prevalent in each distribution channel and will continue to influence product design.
5) Definitions: At the present time in the U.S., definitions have not been standardized. However, companies in the United Kingdom have recognized this is a major problem and have agreed to standardization in this area. Definitions dictate underwriting and claims and, therefore, it is imperative the U.S. regard the standardization of definitions as a high priority.
6) Rates: Since CI insurance is relatively new in the U.S., the industry does not have enough claims information to formulate rate tables based on past experience. However, even when comparing two companies with very similar products (apples to apples), marketers recognize the calculated rates differ.
7) Taxation: Taxation is a gray area. Presently, no federal legislative guidelines have been enacted regarding CI insurance with respect to premium deductions and benefit taxability. Until such time that legislation is enacted, it is best for clients to contact their tax advisors.
8) Premium Growth: There is no definitive source as to the amount of CI insurance premium written in 2002. For the year, however, US Living Benefits has estimated approximately $100 million. The bulk of this premium is likely in the worksite channel, at approximately $60 million. The individual channel likely accounts for $30 million, and the group channel for $10 million. As producers and, more importantly, consumers become familiar with CI insurance, USLB believes CI insurance sales will achieve quantum growth in the next five years.
The two major drivers for increased sales in the U.S will be the health care system and the need for consumer liquidity. With respect to health care, the current health care-cost crisis is forcing many corporations to look at consumer-driven health plans as a solution. As for liquidity, the U.S. economy has been through three years of a bear market, and many have suffered significant financial losses as a result. Given the extra expenses associated with a catastrophic illness, cash liquidity will be a major concern.
CI insurance in the U.S. is not meant to supplant health, life or disability insurance. It is an empowerment tool, enabling the consumer to feel comfortable and secure when making financial decisions relating to a calamitous medical event. Given these factors, other companies are likely to enter this new and dynamic marketplace.
Daniel R. Pisetsky is managing director of US Living Benefits, Manchester, Conn., and founder of National Association for Critical Illness Products, Washington, D.C. His e-mail is: firstname.lastname@example.org.
Reproduced from National Underwriter Edition, June 16, 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.