The U.S. critical illness marketplace continued to grow at a modest rate through 2004, the year for most recent data. This article reviews the data and examines what is needed to move to the next level.

Estimated CI in-force premium increased 4.2% from 2003 to more than $128 million, according to the National Association for Critical Illness Insurance’s Benchmark Study for 2004.

Annualized new sales increased 6.5% to over $61 million, according to the study. Covered lives rose 13% to more than 400,000 lives. (See Table 1).

These results reflect insurance company sales of CI products designed as stand-alone, acceleration, or rider and covering at least the three major CI conditions (life-threatening cancer, heart attack and stroke).

Note: AFLAC participated in the NACII survey; however, its product represented a specified disease policy with a limited CI benefit, so the data was separated out. If AFLAC’s product were included in the industry totals, CI in-force premium would increase to over $233 million, annualized new sales to over $100 million and covered lives to over 775,000.

Growth in the worksite and individual channels has doubled since 2002, according to data on the CI marketplace by distribution channel from US Living Benefits. (See Table 2.)

However, growth in the employee benefit channel has slowed in comparison. This particular channel may be the “sleeping giant,” since several carriers are introducing group CI to very large groups, on either a contributory or a noncontributory basis.

By product type, the three major designs are stand-alone, acceleration and rider. A stand-alone CI insurance product is built on a health insurance chassis. This is the predominant design utilized for three major distribution channels. Policy limits can range from $50,000 to $1 million, depending on type of underwriting used. The average-size policy sold is under $50,000.

The accelerated product can be described as CI insurance with a death benefit feature. Usually these products are designed with an acceleration component that ranges from 25% to 100% payout for CI. Example: If a $50,000 life policy has 100% acceleration for CI, and if the insured is diagnosed with a CI condition, the policy would pay out the entire $50,000, leaving no death benefit for heirs. On the other hand, if the insured never uses the CI feature, the policy would pay the full face amount upon death.

The CI rider products may be added to a life, disability or health chassis. The rider would pay in addition to the core product. For example, some carriers offer a CI component on a life insurance policy so that the death benefit stays intact.

Several trends in the market are appearing in US Living Benefits data. These include:

o Group capacity: This has been increasing from $50,000 to $100,000.

o Individual capacity: This has been increasing to $500,000 or more. Carriers are beginning to target business owners and higher paid workers.

o CI buckets: Some carriers are categorizing CI conditions into buckets. The product is designed to pay out for more than one critical illness, if the subsequent critical illness falls into a bucket of CI conditions which has not yet been used. For example, a $50,000 CI policy with CI conditions categorized into three buckets would have the potential of a $150,000 payout.

o Recurrence: Carriers also are offering a payout for an additional occurrence for the same CI condition. For example, if a policyholder has a heart attack, the policy would pay out upon the initial diagnosis. If the policyholder subsequently has another heart attack (usually after a specified period of time), the policy would, once again, pay a benefit.

o Return of premium: This particular option is being used primarily with individual and worksite products.

o Product design: Several carriers are moving to a group chassis design for the worksite channel. The group chassis facilitates rate changes and ease of state compliance, vs. products built on an individual chassis.

o Portability: Carriers with group chassis products are introducing variations. Some carriers have extended portability to employees, from one year to a lifetime.

o Pre-existing conditions: Some carriers in the group channel are dropping this requirement. However, they continue to use waiting periods, usually 90 days for cancer, and they rely on defining CI as being the “first occurrence,” in order to protect against anti-selection.

o Underwriting: Some carriers with group chassis products are moving to guaranteed issue amounts. Usually, the GI amount is less than $10,000, but employees have an opportunity to buy up with simplified underwriting. GI is offered on a noncontributory basis or by setting up penetration requirements.

Some issues relating to CI need to be addressed. Taxation is one example. Presently, there are no clear-cut Internal Revenue Service regulations regarding CI premiums and/or benefits.

Some CI insurance companies are treating CI benefits similarly to disability benefits, while others are suggesting that their policyholders seek advice from their tax advisors regarding any IRS issues pertaining to CI.

Health savings accounts also need consideration. The IRS has approved the sale of CI insurance in conjunction with an HSA account. However, at this time, there are no specific regulations stating that premiums from an HSA account can be used to purchase CI, although the current regulations do allow for the purchase of tax-qualified long term care insurance.

Compliance is still another issue. Connecticut is the only state that has not recognized some form of CI insurance. State regulations need to be rewritten for CI acceptance before Connecticut will endorse the sale of CI. Hopefully, NACII will lobby in support of changing this regulation.

The growth of CI sales in the U.S. has been modest. Today, sales success is not dependent upon carriers and products, since there are now over 40 carriers marketing the product in all distribution channels. Rather, market positioning and execution appear to be the drivers.

With respect to market positioning, health care and financial liquidity seem to be chief factors.

Regarding the health care point, the nation now is experiencing the growth of consumer-driven health care. This places the responsibility for making health care decisions on the individual consumer. Consumers/employees often are finding themselves saddled with high-deductible health plans, which may include an HSA account. At the same time, CI coverage is being embedded in the chassis of mini-med products. It is certainly worth reiterating that CI is intended to complement medical insurance and not to supplant it.

Regarding financial liquidity, this will help drive new sales, especially individual sales. Financial planners will continue to incorporate CI into financial plans to fill liquidity gaps and to safeguard against medical calamities. CI is an asset-protection product that can provide access to funds when needed the most. I foresee large CI policies ($200,000 to $1,000,000) being sold to high-net-worth individuals as well as CI policies designed for business owners (i.e., key-man insurance).

With respect to market execution, this is a key component for success in CI sales. It is imperative that the industry educate the producers who will, in turn, educate consumers. CI insurance is a product that is easily understood. However, many questions still need to be resolved to take advantage of that fact. For instance, what type of producer will see the value in selling this product? The life agent, health agent or disability specialist? (In my opinion, any agent, with proper training, can present CI to new and existing clients.)

As more companies enter this emerging market, expect to see a greater emphasis placed on producer education and consumer awareness. This will provide the traction necessary for CI to become a mainstream living benefit in the United States.