Ahead of the 40th anniversary of the launch of the world’s first critical illness policy on 6 August, Health & Protection speaks to four of the protection sector’s leading lights to chart the history of the launch of that first product, CI’s introduction into the UK, the arms race among providers to include as many conditions as possible, the industry’s setting of core standards and battling the perception that CI claims are never paid out.
Development of the world’s first policy
The story of critical illness starts with surgeon Dr Marius Barnard, who persuaded a South African life insurer to develop the world’s first critical Illness insurance policy.
Johnny Timpson, who knew Dr Barnard personally, explains the idea for a new kind of policy came to Barnard when he realised patients were surviving operations but these operations were proving life changing or life limiting.
Timpson adds that Dr Barnard realised that what was needed was a policy that rather than paying out on death, paid out on the diagnosis of a health event that would be either life changing or life limiting.
He persuaded life insurer called Crusader Life to develop the world’s first critical Illness insurance policy, Timpson explains, which would gain traction outside of South African and would be brought to the UK just two years later.
UK launch and the gamechanger
Picking up the story, Swiss Re technical manager for life and health in UK and Ireland, Ron Wheatcroft, reveals the UK launch was spearheaded by Cannon Lincoln.
“That was was an acceleration of a life insurance policy where on the diagnosis of a critical illness, there were just four definitions then, the policy advanced just 25% of the sum assured,” Wheatcroft explains.
“The fact that it was 25% is showing how it was dipping a toe in the water to see how it worked.”
But CI products were not really embraced by the market until 1988 and Abbey Life’s launch which proved a gamechanger, according to Ruth Gilbert, partner at Insuring Change.
“The market and advisers loved it. They had a big direct sales force which would have made a big difference and they offered 100% of the sum assured,” she says.
“So it really rocketed from there, and of course, everybody else thought, ‘Oh, we’ll have a bit of that then.'”
Though Alan Lakey, director at CIExpert, tells Health & Protection CI did not really enter the adviser mainstream until the turn of the decade in 1990 when Norwich Union, now Aviva, and Standard Life both brought out plans.
“They were the companies that were the adviser-supporting firms which was the point at which I became enamoured with CI because it was clearly was, and still is, the only policy out there that everybody needs,” he continues.
Conditions arms race
But Lakey adds while the first adviser plans were covering about 16 or so conditions, insurers were in competition and were trying to outdo each other.
“And the way they tried to do that was with regard to adding in conditions in many instances that had no value. It was a conditions race,” he says.
“Someone who worked for an insurer said he used to go to the reinsurers and ask what conditions can be added that won’t cost anything?” Lakey continues.
“So they chucked them in for good measure, and this went on for a while, but it’s only really been in the last 10 years that this has stopped.
“The policy developers, both at insurers and the reinsurers, have started looking underneath the bonnet and saying: ‘Well, why are we turning down claims for this and looking into it and making adjustments.
“So it has become more fit for purpose than previously it was.”
Turning the page back to 1990, Lakey says 15 to 20 conditions were the norm.
“Today it’s if you’re looking at 100% paying conditions, it’s probably about 45,” he continues.
“And if you add in the additional payment conditions, there’s probably another 40, 50 or 60, depending on the company, depending on whether or not they’ve merged.
“If you go back probably only 15 years ago there were many companies saying they cover Alzheimer’s, pre-senile dementia, and also dementia, which was somewhat stupid because all they needed to say was they covered dementia.
“But it was another few conditions to add on and that looked impressive. So it was more to do with a marketing exercise than than being truthful.”
Core standards and partial payments
A key innovator in cleaning up the market, according to Gilbert was protection adviser John Joseph, who created the Working Party to standardise CI definitions.
“What he forced the industry to do was to get together and agree a set of core standards,” Gilbert explains.
“It was thanks to his campaigning that we had in 1999 the first Association of British Insurers (ABI) model critical illness definitions. We still have an updated version of that today.”
In addition to the ABI’s work committing to updating its statement of best practice every three years, another big milestone for CI came in 2006, Timpson explains.
“Up until that point, by and large, insurers were paying out lump sum benefits,” he says.
“So what Vitality did and innovated around was bringing in partial payments so there could be a partial payment of a sum assured benefit depending on the severity of the condition.
“For example, you give a sum assured of £100,000, if only part of the definition is met Vitality would pay £25,000, if the condition progressed at another level of severity then another £25,000 or so, then once the full definition is met, you would get topped up to £100,000.
“That was basically severity-based payments. So then everyone started to replicate that.”
But around the same time, critical illness and the protection sector as a whole was suffering from a perception that claims payment percentages were relatively low.
Mounting a campaign
It was at this point industry spokespeople such as Kevin Carr, now chief executive of the Protection Review and LifeSearch founder Tom Baigrie came to the fore to lead that campaign.
“There was a big issue then about claims not being paid and a lot of the reason claims were not paid was due to non-disclosure at the application stage,” Timpson says.
“So in order to head off a super complaint by consumer groups, the ABI in 2008 launched a statement of best practice in relation to non-disclosure.
“And then overnight we saw a vast reduction in the number of claims rejected for non-disclosure.”
Work with the health service
Bringing the story up to date in times in which the NHS itself is in a critical state, Timpson reflects that Dr Barnard always saw the need for the industry to work with the health service in keeping the policyholder healthy for longer.
“It’s helping the policyholder improve their physical health, their mental health, and as a consequence, the financial health and wellbeing,” Timpson says.
“That means the sector needs to give their policyholders lifestyle advice and advice on how much exercise should be taken and what they can eat. In doing that you may delay that claim happening or you might prevent it from happening altogether.”
Timpson maintains this brings benefits for the individual, their family, the sector and society as a whole.
“Equally, it would be a big plus for the health service if you can delay the onset of of limiting health conditions and acquired disabilities,” he concludes.