May 23, 2007

WHY CRITICAL ILLNESS INSURANCE REMAINS UNSUCCESSFUL

Critical illness insurance (CII) provides very valuable protection and sells well in countries like the United Kingdom and South Africa. Why not in here? This has been a puzzle since the introduction of CII to Canada 11 years ago. We have a huge market, excellent products and fair prices. What went wrong?

Huge Market
Life insurance is considered a "selfless" purchase: the benefit is paid after your death. In contrast, critical illness insurance (CII) is "selfish": you use the benefits for yourself. So CII suits single people without dependents, males and females. Do you have a mortgage? If you're married, you and your spouse can have your own policies. You can buy coverage on children. You may want a plan that returns your premiums if you make no claim.

The World's Best CII?
Canada learned from the experiences of other countries and created what may be the world's best CII plans. In other countries, insurers were able to increase the prices after you've bought a policy. In Canada, prices were guaranteed. Thanks to competition, prices were also reasonable. Experience shows that the prices were actually too low for the benefits provided.

But Low Sales
In 2006, only 85,000 CII policies were sold in Canada --- a drop of 5% from 2005. Including sales from all previous years, there were only 322,000 policies still in force. That's roughly the population of Oshawa (ON), Victoria (BC) or Windsor (ON). That's not much considering our population is almost 33,000,000 (see the nifty Statscan Population Clock).

There are various reasons
  • lack of standard definitions
  • poor marketing by insurers
  • steep learning curve and discomfort of advisors
  • perception of high prices
  • high decline rates
Let's look at a few in more detail.

Mangoes and Papayas
Term life insurance plans are considered interchangeable. So products are often selected on the basis of price.

To prevent critical illness insurance from becoming a commodity, insurers used different definitions and covered different numbers of conditions. This made product comparisons more difficult.
  • Is it better to pay more to have more conditions covered (e.g., 21 instead of 19)?
  • Is it better to have stronger definitions and fewer conditions covered?
  • Does a higher price mean a better product?
Suppose you're a 30 year old female needing $100,000 of CII and you pick Term To 75 with level premiums and return of premium. The monthly price ranges from $53 to $94.

The Definitions
Suppose your policy defines a coma as a deep state of unconsciousness, with no reaction to external stimuli or internal needs, persisting continuously with the use of life support systems for at least 96 hours. Would your claim be paid if
  • still showed signed of primary defensive reflexes to external stimuli? or
  • you were in a coma but not on life support?
How would you and your family cope if the claim were not paid? How would you feel about the advisor who recommended the policy over one which would have paid? How would you feel about the insurance company which denied the claim?

The Price
The price of critical illness insurance looks high when compared with life insurance, but this is comparing mangos and papayas. They cover different risks and different probabilities of claim.

Denial of Claims
When you're interviewing job prospects, be wary of the candidate who's too eager to join you. They know something you don't. And that won't be in your favour.
A person who knows they are in the early stages of a critical illness may be highly motivated to buy CII, in the hopes that the insurance company won't find out. This does happen. A study by a reinsurer showed that 15% of claims were denied in 2001. Of these denied claims, here are the reasons why
  • 40% - misrepresentation by the client
  • 20% - 90 day cancer exclusion
  • 20% - in situ cancer
  • 20% - heart attack did not meet the contractual definition
So most of the denied claims were not paid because the person insured knew more about their health than they disclosed.

What This Means To You
Critical illness insurance offers valuable protection at fair prices to healthy Canadians (see Critical Illness Insurance: The Basics). Yet so few of us protect ourselves. You can investigate your own situation by finding an advisor who is knowledgeable about this type of product.

5 comments:

FourPillars said...

I think a lot of people don't get it because it seems like the odds are stacked in favour of the insurance company. Unless you get the exact illness that is in the list you have wasted your money.

Life insurance is a bit more black & white.

Promod said...

That's an interesting observation, fourpillars. Thanks for sharing it.

Insurance can be seen as a lottery, but it's really a risk-sharing mechanism: collect a bit of money from many people and pay lots to the unfortunate ones who suffer a loss. The goal is to be fair and make some money along the way. Competition keeps prices in check. Multinationals like Met Life (my first fulltime employer), Prudential Life and ING (NN Financial) left the Canadian life & health insurance marketplace in search of greater profits in other countries.

Governments have the monopoly on gambling with lottery tickets and casinos :)

Anonymous said...

By the end of 2003, there were about 170,000 individual CI policies in force amounting to CAN$ 170m annualised premiums.

The average face amount is about CAN$ 100,000, with an average issue age of 40 and an average annual premium of approximately CAN$ 1,000. In 2003, individual CI sales reached 80,000 policies, generating premium dollars in the range of CAN$ 75m. New business premiums have grown at a rate of 39% per year on average over the past two years and projected sales indicate conservative growth of 14% per year for the next five years.

Your stats are different; where do you get yours from?

Many thanks.

Promod said...

Thanks for your comment about sales.

I used figures from "Canadian Individual Critical Illness Insurance", Fourth Quarter Review 2006. It's published by LIMRA International, which is considered a reputable source.

Where are your figures from?

ArindamSenIndies said...

Poor marketing by insurers is certainly one factor why such policies have not surfaced. People in our country are yet to understand the full potential of such coverage. Many of us have opted for disability insurance policies when we actually have no risks pertaining to injuries. If it's only about severe illnesses, then we should go for critical illness insurance coverage.