As Critical Illness Policies Take Root, Reinsurers Can Help Them Grow
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Critical illness insurance is well established in many markets where it continues to grow and thrive. Current estimates in the United Kingdom are that 14% of the working population has a CI policy.
Though the U.S. market has been slow to develop and were still in the early stages, the product is taking a new shape here. As the market grows, both direct writers and reinsurers must be sure to learn from the emerging wisdom of more mature markets.
In general, the CI product in the U.S. is simpler, with fewer covered events than typical products in, say, the U.K. or Canada. This makes sense in an environment where the first challenge is educating the distribution network and the public–and where most claims, even in plans covering many events, are for the "core" illnesses, anyway. Advice from other markets, especially those that have seen the perils of "my products got more stuff covered than your product," encourages us to chart our own course in product design.
Unlike many other markets where fully guaranteed rates are common or even the norm, thus far, the "guaranteed rates" phenomenon hasnt taken hold here.
Right now, the U.K. and other markets are coping with the impact of the withdrawal by several major reinsurers of reinsurance support for rate guaranteed pricing. This means that as of January 2003, many companies in these markets can no longer offer stand-alone CI products with guaranteed rates. Where such guarantees continue to be available, they are now expected to add from 40% to more than 50% to the premium rates. We must recognize that our filing requirements will make achieving required increases challenging until a credible experience base has been developed. So, in the short term we will have to live with the pricings we file.
The reinsurance industry has played a major role in the creation and growth of the CI product in most markets because of the need for product development and pricing expertise as well as risk-sharing, on both an excess and shared-risk basis.
Some years ago, two international reinsurers effectively brought the CI product to Canada, importing expertise resident in their European markets and bringing a number of significant Canadian insurance companies into the CI market, which is now well established and continues to grow.
Here in the U.S., we at Optimum Re find that due to scarce resources, many companies could not invest in development of a CI product, even when they see great opportunity, without the resources, guidance and support of a reinsurer.
One thing that many here are not aware of is the continued proliferation of so-called "acceleration" CI products in other markets. One U.K. company told me recently that more than 75% of their CI business is on an acceleration basis, a combination CI and life policy where the event that first occurs triggers the payout of the full face amount. Could this be problematic?
Potentially yes, should the CI pay first leaving the insured uninsurable and with no other life insurance. Or not, when the product is sold, as it often is in the U.K., as decreasing term insurance to cover a mortgage obligation. In that case, the product has the desired effect–the mortgage disappears.
At this point in the U.S., most products do not require the insured to survive for a prescribed period of time following diagnosis in order to qualify to claim, while a "survival period" requirement exists on almost every CI product elsewhere.
