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CI Needs To Emerge From The Cloud It's Been Under

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Critical illness insurance remains under a cloud, ignored by most carriers. This is despite a silver lining.

The silver lining is that there is a small corps of dedicated CI insurance companies, and all companies in that group reported that their 2005 CI sales were up.

CI insurance pays benefits to insureds who are diagnosed with a specified critical illness, such as stroke, heart attack and cancer. As shown in Chart 1, the product is now available in four chief product designs. Chart 2 shows the most common benefit triggers. What of marketing? All forms of individual and group marketing exist in this market, but worksite marketing apparently has become very prominent.

In the marketplace, the product’s branding has suffered from a noticeable tendency to confuse modern CI insurance with its forerunner–the one-cause product (usually cancer insurance) that arose in the 1960s.

As is evident in Chart 2, the modern CI product is entirely different, because it seeks to address multiple causes of critical illness. Not all policies cover all the triggers shown, but many of today’s CI policies cover at least five or more different diagnoses.

As you may recall, the modern CI product arose in the United States in the 1990s as an accelerated death benefit vehicle for life insurance. Some companies adopted it in the meaningful-to-the-public form described in Chart 2. This was done by rider; it therefore constituted a substantial extra rider sale for agents.

However, a blow to the product was delivered when most companies later adopted the “terminal illness accelerated death benefit” to address the critical illness exposure. This was a blow, because the terminal illness reference was vague, subject to decisions by doctors and could be included in products “at no additional charge.” (That last one–the no extra charge–had curbside appeal because it was a value-added feature. However, for the insurer and agent, it produced no additional revenue.)

Gradually, the lump-sum stand-alone product emerged, and it seems now to be prominent. In the process, it became a “health insurance” product.

Even the new CI riders to life products operate on a stand-alone basis and do not interfere with the death benefit. (The original 1990s products typically accelerated much of the life policy death benefit, often leaving only 25% benefit for heirs. This was found to be unpopular!)

The CI riders for annuity accumulator products seem to be valuable features. They provide another way to use the policy’s accumulation value if a CI strikes, enhancing liquidity.

A little more on the history. CI distributors never fail to mention that CI insurance arrived here in the United States after becoming a major hit in the United Kingdom, where it is often sold in connection with mortgage insurance. It also has become popular in Canada.

However, in the U.S. the product remains under that cloud, despite the small corps of dedicated companies that keep pursuing the market. The industry’s main job right now is to bring it out into the open.

What about the actuarial features? CI, like LTC insurance, is subject to a very sharp upslope in claim cost as age increases. (This slope is more steep than that of life insurance.) This has spurred lapse-based pricing–and rate increases when the lapses don’t occur. The industry surely can get around these problems.

Here’s an optimistic thought: The CI product is about survival. It’s there to help clients cope with the financial consequences of surviving these terrible illnesses. That is important, because it is now known that recovery and return to normal life do occur more and more frequently.

In fact, the entire insurance industry and its agents and brokers are in the survival business (in every sense). Annuity products (immediate, deferred, fixed and variable, index) and LTC insurance can be viewed as survival products, too, albeit for financial exposures that go beyond CI, as well.

The industry may find greater success with CI by clarifying this survival message to the public and to the distributors. If the product is not confused with terminal illness, and if the marketing focuses on the positive aspects of benefits for survival, CI may just emerge from that cloud it has been under and become a product leader in the U.S. as well as the U.K. and Canada.


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