7 ways to win the hearts of critical illness insurers

Critical illness insurance issuers are opening their arms to you.

The question is: How do you hug back without knocking them over?

A critical illness insurance policy pays a lump sum to an insured who suffers a covered health problem.

The first modern critical illness insurance policy appeared in South Africa in 1983. Jackson National Life Insurance Company brought the concept to the United States, in the form of an accelerated life insurance benefit, in 1989.

Sales grew so slowly that, as late as 2003, the Society of Actuaries ran a newsletter article with the headline, “What is critical illness insurance?”

Related: CI vs. the alternatives: What advisors should know

Today, insurers see offering critical illness insurance as a way to help consumers with growing holes in major medical coverage, in the individual market, the group market and the voluntary benefits market. Fully insured workers face an average of $7,500 in out-of-pocket costs after surviving a critical illness, and many survivors of serious illness face costs related to their inability to work, even if they have disability insurance, according to Wellesley Hills, Massachusetts-based Sun Life Financial U.S.

Critical illness insurance falls outside the scope of Affordable Care Act mandates. So issuers can set benefits caps as low as they like and use medical underwriting.

Related: SOA: Some actuaries are hungry for critical illness data

Mutual of Omaha Insurance Company, for example, has one band of risk classes, for people who get $10,000 to $99,000 in individual critical illness insurance coverage through a simplified underwriting process, and a second band for people who get $100,000 to $250,000 in critical illness insurance coverage. People in the second band have to go through a full medical underwriting process.

Mutual of Omaha will offer applicants with mild asthma standard rates, and it might offer coverage to some older applicants with Type 2 diabetes. It won’t take applicants with Type 1 diabetes or with severe asthma.

Issuers also can design the products to be much less sensitive to low interest rates than typical long-term care insurance policies.

In the individual major medical market, issuers have been doing just about everything short of hitting agents with brooms to keep them away.

In the critical illness insurance market, issuers pay generous commissions.

Related: U.S. workers ill-prepared for disabling illness or injury

Issuers pay generous commissions in the critical illness insurance market. (Photo: iStock)

Growth

In most states, for example, Guardian Life Insurance Company of New York pays 15 percent on the first $15,000 of group critical illness insurance premiums. For voluntary critical illness insurance, the company pays a first-year commission of 20 percent and a commission of 13 percent for the second and later policy years.

Washington National pays a first-year commission of 40 percent and a second-year commission of 4 percent to sellers of its Washington National Critical Solutions policy.

In the District of Columbia, Guarantee Trust Life Insurance Company of Glenview, Illinois, pays a first-year commission of 60 percent of the first-year premiums and 20 percent of the premiums for the second through fifth years, according to a product filing approved in October.

But the issuers are reaching out to you knowing they need help with attracting the right kind of business.

U.S. sales increased 15 percent between 2013 and 2014, to $380 million, according to a team in the Stamford, Connecticut-based office of Gen Re.

Forty-one insurers were actively selling the product, up from 30 the year before.

More than half of the insurers already in the market said they wanted to focus more on selling critical illness insurance, and none said they wanted to cut critical illness insurance sales.

Stephen Rowley, a vice president at Gen Re, said that growth rate looks “pretty spectacular” when compared with the growth rate for other insurance products he follows.  

“Most of the interest remains in the group and worksite areas,” he said. “Though we’re seeing an uptick in individual carriers looking to add critical illness to their portfolios.”

One cloud hanging over all that growth is uncertainty about claims.

Related: 3 ways to make ACA uncertainty lemonade for 2017

U.S. issuers have their own proprietary experience critical illness insurance data, but they depend heavily on government data for the general U.S. population when preparing rate filings. (Photo: iStock)

Risk manager

The issuers’ main defense against inaccurate claim forecasts is wiggle room: The expected ratio of claims to premiums is usually 50 percent or 55 percent.

Although the products appear to be much safer to sell than major medical coverage or long-term care insurance, one concern is that insurers are setting prices for the products without having the same kinds of time-tested actuarial tables they use to set prices for life insurance or disability insurance.

U.S. issuers have their own proprietary experience critical illness insurance data, but they depend heavily on government data for the general U.S. population when preparing rate filings.

The Canadian Institute of Actuaries, an Ottawa, Ontario-based group, published one Canadian critical illness insurance morbidity study in 2013, based on 1,823 claims that eight Canadian issuers received from 2002 through 2007. The institute then published a follow-up in October. The second survey was based on 3,393 claims filed with 11 issuers from 2005 through 2014.

The actuaries found that, in Canada, critical illness insurance underwriting helped keep the ratio of actual claims for a condition to the incidence of claims for the condition in the general Canadian population far below 100 percent. But the ratio of actual claims to expected claims was higher than for most of the higher conditions.