By Daniel Pisetsky
The critical illness insurance marketplace continues to grow. This review details how and also looks toward new growth areas.
Table 1 represents a consolidated overview of the CI marketplace by distribution channel. As can be seen, growth in the worksite and individual arenas is continuing in 2004, but growth in the employee benefit arena is slower.
What do these channels have in common? Each continues to use the 3 core CI product designsstand-alone, acceleration and rider. (See Table 2 for a consolidated market overview by product type.) These policies can be sold as non-contributory or contributory or directly purchased by an individual.
o A stand-alone CI insurance product is built on a health insurance chassis. Usually, these products are guaranteed renewable and can offer benefits ranging from $25,000 to more than $1 million.
o 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 critical illness diagnosis during a policyholder’s lifetime, the $100,000 is payable on death.
o Some products embed a supplemental CI rider on a life, disability chassis, or health 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.
Core product designs are changing significantly. The original CI concept was that a lump sum would be paid upon first diagnosis of a CI condition. Life-threatening cancer, heart and stroke account for approximately 75% to 80% of the CI conditions diagnosed. A policyholder diagnosed with any of the 3 core CI conditions would receive a lump-sum payment upon first diagnosis.
But U.S. product designs are changing the original concept of first-diagnosis lump sum to a more broad-based product. For example, many CI products now on the market offer some of the following benefit options.
On first occurrence: Lump-sum payment upon first diagnosis of a covered CI condition.
On re-occurrence: If the insured receives benefits for a covered CI condition and subsequently has a re-occurrence of that condition, benefits will be paid again. Subsequent diagnosis must occur after a specified timeframe from first diagnosis, and with cancer, the insured must be treatment-free for a specified timeframe.
Additional occurrence: An additional benefit for a covered CI condition for which benefits have not been previously paid and separated by a specified timeframe. Some products are offering a wellness benefit rider, which pays a specific amount per calendar year for screening tests, as well as spousal and dependent child coverage. In addition, other riders are included or available such as monthly recovery benefit, hospital confinement benefit, transportation benefit, lodging benefit, as well as individual, single parent family, or family coverage plan selections.
Some CI policies are offered with or without cancer coverage, to ensure that a person only can receive benefits for an illness under a policy or rider once.
With some CI products, the consumer has a choice of plans. For example, a plan could be purchased with or without the first occurrence benefit. There are pre-packaged benefits, which are divided into category/groups. Within each category/group, there are specified CI conditions. For example, if an insured has a heart attack (group I100% benefit) and subsequently has a major organ transplant (group II100% benefit), the insured is covered for both conditions and will receive 100% of the benefit for each. However, if an insured has a heart attack (group I100% benefit) and subsequently has a stroke (group I100% benefit), the insured is covered only for heart attack at 100% (benefit is exhausted); therefore, there will be no additional group I payout.
Covered conditions vary from policy to policy. Some contracts may include new covered conditions such as loss of independent existence, nursing home confinement, Alzheimers, multiple sclerosis and severe acute respiratory syndrome. Another new condition covered under CI family term coverage offers a partial benefit for a life-altering birth defect. Both Alzheimers and multiple sclerosis are difficult conditions to diagnose, as well as define, and may ultimately have an effect upon claims.
As this dynamic market continues to develop, the CI insurance industry needs to address many concerns and issues such as underwriting, definitions, rates and taxation.
Underwriting: This is the determinate for offering guaranteed issue, modified guaranteed issue, simplified issue or full underwriting. Tremendous potential exists for anti-selection with CI products. Both Europe and Canada have been changing their underwriting guidelines, since many of the policies originally were designed as non-cancelable. On simplified issue applications, family history questions are starting to show up as well as questions on specific illnesses.
Definitions: The United Kingdom has an agreement among carriers to provide more standardized definitions. In the United States, definitions of conditions still differ.
Rates: Product tweaks make rate comparisons difficult. This is still a relatively new product in the U.S. and incidence rates and claims are not yet available to develop a standardized table similar to mortality tables. Therefore, especially from a consumer perspective, it is difficult to do a comparison of products and rates.
Taxation: In the U.S., defined tax guidelines with respect to premium deductions or the taxability of benefits are not available. As the product line continues to grow in popularity, however, this is likely to be addressed.
In the U.S., CI insurance has the potential to play an integral role in the changing health care environment, which will thus serve as a catalyst for CI sales. As the nation moves more toward consumer-driven health care, for example, many insurers are positioning CI as a supplement for high-deductible health plans as well as providing additional coverage for disability insurance. CI products will be embedded not only into the health chassis of medical products, but also perhaps into HSA accounts, whereby deferred, non-taxable money can be used to pay expenses not covered by high-deductible medical plans.
CI insurance has a role in comprehensive financial planning, too. Given equity fluctuations and changes in individual portfolios, CI can offer an individual/family the necessary liquidity for an unforeseen catastrophic event.
How does CI insurance position with long term care insurance? The sweet spot for CI sales tends to be in the 30 to 50 age range. This is the ideal target population, especially in view of the product pricing. Meanwhile, most LTC products are being sold to the age 55+ population. Both products are asset protection products, however.
CI is currently being utilized in worksite sales. The ideal product for the future would be a convertible CI product, which can be converted to an LTC product when a person reaches age 55+, with no underwriting. Currently, this product has not been developed, but the fact remains that these two products could complement each other in terms of their mutual goalproviding asset protection.
In 2002, the National Association for Critical Illness Insurance, Washington, D.C., estimated there was $100 million of in-force CI premium. Based on NACII’s 2003 Benchmark Data Survey, CI in-force now represents $123 million, a 23% increase, and new sales for the year were $57.5 million, an 80% increase from the previous year.
These results were based on insurance companies selling a traditional CI product covering at least the 3 core conditions (life-threatening cancer, heart attack and stroke). The NACII study noted that AFLAC’s worksite health product provides a limited CI cancer rider, paying a $5,000 lump sum on first occurrence and $2,500 on re-occurrence. If AFLAC’s CI premium is included, then CI sales would increase by $30 million to $87.5 million and CI in-force would increase by $65 million to a total CI in-force premium of $190 million. (See table 3).
In sum, CI products are constantly evolving, in additional covered conditions, plan choices, rate variances and other areas. Today, the consumer can choose a basic CI policy, which would cover the core CI conditions, or a policy with bells and whistles geared to coincide with specific needs and wantsa basic or enhanced policy. Is the consumer going to be the benefactor of this new CI revolution? I leave you with this question.
Daniel R. Pisetsky is managing director of US Living Benefits, Manchester, Conn., and founder of National Association for Critical Illness Insurance, Washington, D.C. His e-mail is: [email protected].
Reproduced from National Underwriter Edition, August 19, 2004. Copyright 2004 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.