Reinsurers’ hardening heralds critical illness upheaval

By Alain Thériault | January 20 2003 05:47PM

Over the short term, reinsurers and insurers will rethink several critical illness insurance guarantees, said four specialists at the 2002 Insurance and Financial Products Convention. The critical illness market, which brokers have barely mastered, is headed for turbulence.

Driving the projected changes, the panellists reported, is the toughening of reinsurers’ risk underwriting. The earliest effects of this increased severity, such as the demise of certain guarantees, are already visible.

Maritime Life recently announced it would stop selling its 10-year premium return option on January 1. This option allowed premium returns without cancelling the policy.

Transamerica recently launched its first critical illness product. Its structure differs from other critical illness products because instead of granting a predetermined lump sum to the insured, it offers the cost of medical treatment of up to $1 million. This makes the product less risky for the insurer than competing products.

Will product characteristics change under reinsurer pressure? “ Yes,” said Eddy Levy, living benefits manager North American markets at reinsurer, ERC.

He emphasized level premiums and guaranteed renewals may pose profitability problems for reinsurers and insurers in the critical illness market. Mr. Levy added that these guarantees are particularly thorny for policies whose premiums are guaranteed up to age 65 and 75.

Compounded by customer-friendly definitions of illness, these guaranteed premiums may plague insurers over time. Mr. Levy said it is impossible to foresee the impact and the scope of these definitions 30 or 40 years down the road, nor the number of critical illness claims covered by current contracts.

He added scientific progress has refined diagnostic methods considerably. He mentioned the example of troponin, a new biochemical marker increasingly used to diagnose heart attacks. What’s more, an ever-growing number of illnesses are being detected, boosting the number of claims.

Robert Mallette, Senior Vice-President, Development at reinsurer RGA, also foresees change. He mentioned the United Kingdom has vast experience in critical illness insurance. From a stand-alone product, the British firm RGA mostly reinsures products in the form of riders, known as “accelerated payment” products (tacked onto loan contracts). Also in the UK, there is a possibility RGA will withdraw from guaranteed renewable product reinsurance next year, Mr. Mallette added.

Standardized definitions

Mr. Levy considers it imperative that critical illness definitions be standardized. He sees the United Kingdom as a model to follow, and it developed a working committee to this effect. Insurers, reinsurers, distributors, and consumers got together and drafted a very clear list of definitions. “They intend to update it every three years,” Mr. Levy said. This scale has the advantage of keeping pace with the latest developments in medicine and is easier for consumers to understand. For their part, insurers enhance the product with a training component.

Stéphane Rochon, Director of living benefits development at the brokerage firm Cloutier Group, also endorses standardized definitions. He commented that more rigorous medical pricing is needed, more questions must be asked and insurers should pay closer attention to family history.

He said the battle over the number of illnesses covered by policies, being waged by several competitors, is a mistake. Only four of these diseases – cancer, heart attack, stroke and coronary bypass – frequently surface in claims, Mr. Rochon pointed out.

A hybrid product

Several brokers worry critical illness insurance will steadily overtake disability insurance in thr sales practices of financial advisors. But their fears are unfounded. The industry may soon solve the dilemma by merging both products, the panellists explained.

“Critical illness insurance is advantageous when the insured is diagnosed with a critical illness covered by the policy. Disability insurance replaces the wages of the insured that satisfy the definition of disability foreseen in the contract. The first coverage foresees a payment of a lump sum whereas the second offers a monthly payment. Ideally, the insured should procure both types of coverage. A hybrid product may be the future face of these products,” Mr. Levy told the audience.

Mr. Rochon agrees a “combo product” is a good idea. He does not understand why the industry has not yet launched a product that combines critical illness and universal life insurance or critical illness and functional independence (a product that pays benefits to those that lose their independence).

Joseph Wellman, Assistant Vice-President Living Benefits at Canada Life, pointed out that the non-cancellable disability insurance product is not about to disappear. He admited the number of players in this market has decreased sharply, but the needs are still there.

Over time, mergers have trimmed the number of Canadian disability insurance players from 12 to four. A similar trend took shape in the United States. “Our southern neighbours went from close to 270 insurers in this market to 28, which means that we are not the only ones to face a marked reduction in the number of non-cancellable disability insurance players.”

The industry is still a long way from satisfying the needs of all Canadians in terms of disability and critical illness estimated Mr. Wellman. Canada Life’s data shows 7.8 million Canadians do not have disability insurance. “I am sure you will agree that we are still far from meeting all of the population’s disability needs.”

Mr. Wellman is convinced critical illness insurance will never replace disability insurance.

Mr. Mallette summarized the situation. “We are presently in a transitional period. Some products are changing, but disability insurance will not be superseded by critical illness insurance.”