The industry has merely skimmed the surface of the individual critical illness insurance market in Canada according to a Munich Re survey comparing buyer potential with sales to date. This study revealed an immense pool of underserved clients.
In its report on the results of individual critical illness insurance (CI), LIMRA International tallied 85,000 policies and $78 million in premiums sold in Canada in 2006. LIMRA compiled the results of 16 insurers, including the five largest players that represent 76% of premiums sold in Canada in 2006: Great-West Life, Industrial Alliance, Manulife Financial, RBC Insurance and Sun Life Financial. For its part, reinsurer Munich Re estimates 2006 sales at $89.2 million.
Despite these sales results, the product’s penetration is modest, at best, according to the Munich Re’s buyer potential survey which found that 94% of the mass market remains underserved.
Munich Re unveiled these findings at a conference organized by AIG Life Canada in Montreal in May.
In its calculations, the reinsurer considers the potential market to be the group of Canadians ages 35 to 54, a population of 10.1 million in 2006.
It then presumes that 35% of this population would be ineligible for a CI policy for income or health reasons. Munich Re set the average premium for policies at $1,000.
Under these criteria, the sales potential in 2006 was 6.6 million policies and $6.6 billion in new premiums.
Given this potential, Munich Re finds the sales results perplexing. 2006 sales were down from 2005, a year also marked by a decline in CI sales in Canada. This phenomenon was caused by the increase in premiums that mostly occurred in early 2005. After peaking at $95.2 million in 2005, new CI premiums dropped to $89.2 million in 2006, the Munich Re data reveal.
The reinsurer pins the slowdown on several other factors, which it portrays as challenges.
For one, Munich Re explains, the CI product has only a limited results history. It was primarily designed based on statistics on the incidence of diseases. Another reason: in Canada, the strong will to maintain guaranteed premium rates pushes the product’s price upward. In addition, the product distributed through advisors has leading edge features. As a result, few solutions are modestly priced. Insurers and reinsurers are also pondering the impact of future medical discoveries on pricing and definitions.
For their part, many advisors are reticent to plunge into this business niche. Presentation participant Daniel Dessureault, vice-president, sales at AIG, knows from experience that few advisors specialize in CI. "Only 25% of advisors are brave enough to offer critical illness insurance to their clients," he said.
Mr. Dessureault adds that CI sales will not advance until the industry rises to the challenges Munich Re described.
The path to CI success is strewn with obstacles, many advisors believe. These include thorny risk underwriting, endless delays and a high rejection rate.
These headaches are grounded more in myth than in reality, Munich Re emphasizes. In its 2006 Canada CI Survey, Munich Re reveals that the issuance time in CI is not as bad as is commonly believed. In 2005, 44% of CI policies were issued within 30 days of the company’s receipt of the proposal, and nearly 20% were approved within 31 to 45 days.
By comparison, 58% of life insurance policies were issued within 30 days of the insurer’s receipt of the proposal in 2005.
As for the rejection rate for CI policies, Munich Re puts it at 13% of all policies proposed in 2005. An additional 12% of policies were not followed up (clients refuse or change their mind), while non-remitted policies represented 4%. The corresponding data for life insurance were not mentioned.
In addition, 71% of CI applications submitted resulted in the issuance of a policy in 2005, versus 79% of life insurance applications.
Of the CI policies issued in 2005, 59% were at the standard rate (including 4% with exclusions) and 12% were issued with additional premiums.
Whereas many believe the reinsurer often sways the insurer’s decision to issue a policy or not, a seasoned underwriter couldn’t disagree more. "The issuer makes the decision 95% of the time," says Hélène Châtelain, vice-president, pricing and new business, from AIG headquarters in Toronto.
The insurance company can automatically incur the reinsurer’s responsibility for a portion of the risk written, without having to consult them each time. This practice, known as automatic retention, is common in the industry, Ms. Châtelain explains.
Under this type of agreement, both parties are expected to act in good faith. If, however, an insurer cuts corners and disregards generally accepted CI underwriting rules, then they may find that reinsurers are less inclined to be flexible.
Starts with advisors
To make sure everyone plays by the rules, the underwriter calls for a rigorous underwriting approach, starting from when advisors collect the prospective client’s information. "If they complete the long application, pricing will go faster," she told the audience. In addition, she considers it crucial that the advisor have in hand all of the client’s medical reports from the start of the quoting process.
She warns advisors to proceed with caution when gathering information from "enlightened" consumers such as physicians or, not surprisingly, underwriters.
Family medical history can make or break a CI application. Awareness of an early diagnosis of an illness in the family is vital.
Clients with a heavy medical history are no cause for despair. "The client can get away with an additional premium. Plus, the simple use of exclusions without additional premium is a growing trend." She has seen extra premiums range from 25% to 150%.
It is also very important to know all the details of the clients’ profession or other activities that may predispose them to contract one of the medical conditions covered by the product.
Ms. Châtelain points out that clients can receive credits in some situations. For example, a non-smoker with no history of medical problems, and whose blood pressure and weight are normal will earn points. Credits can also be offered to potential insured ages 50 and over, with satisfactory cholesterol, blood pressure and EKG readings.
Of note, clients who are adopted are never penalized if they cannot supply a family medical history.