At the recent World Critical Illness Insurance Conference, Munich Re unveiled new benchmark definitions for 26 illnesses often covered by critical illness insurance policies. The move may mark the beginning of the end for the differences in policy wording that have been the industry norm.
Munich Re first formed a definition review committee in March 2007, and it initially consisted of the seven insurers who represented more than 80% of the CI market, namely RBC Insurance, Sun Life Financial, Manulife Financial, Desjardins Financial Security, Industrial Alliance, Great-West Life and Canada Life. These companies were later joined by The Cooperators, Empire Life, AIG Life and Standard Life.
At the conference, held in Toronto from April 28-30, Hélène Michaud, director of marketing for Munich Re, explained the impetus behind the move. Insurers felt that the wide range of definitions currently available was causing undue complexity and confusion, and was ultimately discouraging many advisors from discussing critical illness insurance (CI) with their clients. She noted that today, only about one in four brokers are active in the market. "We feel that we’ve yet to reach the potential that truly exists within CI," she said.
Ms. Michaud suggests that there was often very little real difference between definitions. In the case of cancer, for example, one insurer would refer to a tumour while another would use the term malignancy. "Why not use the same word for both?" she asks. In the case of skin cancer, one insurer required a depth of 0.75 millimetres, while another insisted on 1 millimetre. It’s a small difference, but Ms. Michaud says that some advisors were spread sheeting the definitions to see where the discrepancies lay.
The purpose behind the benchmarks wasn’t to usher in sweeping changes, she says. They are not mandatory, but rather suggested with the hopes of creating a certain level of consistency in the industry. "The whole exercise here was really to look at those definitions in detail, making sure that by changing those definitions, we were not liberalizing or restricting the contract." She also noted that in some cases it had been ten years since some of the definitions were first introduced, so it was a good opportunity to update the wording to reflect recent medical advances.
After her presentation, Ms. Michaud, along with representatives from The Co-Operators, Desjardins, Manulife, Standard Life, Sun Life, Canada Life and Great-West Life, joined The Insurance Journal for a brief round table discussion. The insurers were unanimous in their insistence that the benchmarking was done primarily for, and at the behest of, financial advisors. Each company said they would be rolling out the new definitions as soon as their systems maintenance schedules permitted, either by the end of 2008 or in early 2009.
"We had been hearing from advisors about the complexity of the product, and that the differences that existed in the definitions were a barrier to entry," comments Ms. Michaud, alluding specifically to a survey that Munich Re conducted with The Insurance Journal last fall, in which advisors ranked the establishment of CI benchmarks as the second most important item on their wish list.
"I think the advisors were gridding definitions as a marketing device," adds Gerry Anthony, senior consultant, product development at Standard Life. He doesn’t think it’s appropriate to rank one CI product as better than another based on minor differences in wording "It’s sort of like sitting down on a life product, and let’s say we all had different definitions of the suicide exclusion. Ours is two years, yours is 730 days. Does it really make a difference in the big scheme of things? The definitions were generally fairly close for most of the conditions," he says. "The consumer is the person who is buying the product, and the consumer is the person who has to have a good understanding of what they are buying. And if we’re confusing the consumer by focusing on subtleties in definitions of covered conditions, we’re putting the focus on the wrong spot."
Janice Lofendale, director of individual actuarial at The Co-operators, notes that global pressures had also come to bear on the Canadian market. "I think the fact that the U.K. had standardized definitions played a role. Our brokers heard about that at this conference in the past and that peaked their interest," she said. Since other markets had managed to reach an agreement, she says advisors were beginning to wonder why insurers couldn’t do the same thing here.
"I also think it will help us move away from definitions battles," says Nathalie Tremblay head of health products at Desjardins Financial Security, who remembers being in competition with Industrial Alliance for a large case, and the client’s decision came down to the wording of a couple definitions, including the one for brain tumours. "We had to get the opinion of a neurologist to explain that our contract, in fact, was almost the same, so there was no big difference." She suggests that, ultimately, this kind of nitpicking over such slight differences in contract wording did little but lower the client’s opinion of the industry as a whole.
Michael Dawson, critical illness insurance product director at Manulife thinks that, besides making it easier for advisors to understand and compare CI products, benchmarking may address some post sale concerns. What if an advisor wasn’t aware of a subtle difference in definitions at the time the policy was sold? Could he or she be exposed to a lawsuit? "Heaven forbid that, at claim time, it might have been adjudicated differently at another company," he says. "Just the doubt that there may be a difference in the definitions, having to be aware of them, made it a more complex product."
But what, exactly, is the difference between a standard definition and a benchmark definition?
David Baker, director of individual health product development at Sun Life, explains that the term benchmark suggests that the same claim would be paid by each company, but there is room for slightly different wording in the definitions to align with the other wording in the contract. "A standardized definition would imply that every word is identical, and that there is a uniform wording," he says. For example, one company may write its policies using the third person, while another insurer would use the first person, but the benchmark definition would be the same.There is, however, at least one voice crying out against these changes. Dick Gilbert, president of GCI Insurance Services and Megacorp Insurance Agencies, believes that the introduction of benchmarks will remove a healthy level of competition from the market. "This recent event clearly demonstrates the dangers of having such a limited number of reinsurers in the individual CI market," he says. "These few have dictated and forced their terms and conditions on the industry and the results are consumers will suffer and our industry will be given yet another black eye. It is obvious that the underlying agenda is simply to reduce claim payments, while not necessarily reducing the number of claims. Standardized definitions is simply a method to water down the scope of a covered condition and reduce claim payments."
The insurers, however, reject this argument.
When he spoke with The Insurance Journal in May last year George Turpie, vice-president, living benefits, at Great-West and Canada Life, had some concerns about how standardization had worked in the U.K., but he expressed support for the initiative after Ms. Michaud’s speech, saying that multiple definitions that are barely different simply create confusion. "With the benchmark definitions advisors won’t be afraid of comparing one company versus another company’s definition," he says. "The differences will be things they understand, and they’ll be able to speak to more clients. There’s no way this is about earning more money for Munich."
Expanding the market
In a telephone interview shortly after the conference, John Parker, associate vice-president, product and marketing, living benefits and individual insurance at Manulife, also said that the benchmark initiative wasn’t about claims or pricing, but rather about expanding the market. "This is something that, as an industry, we’ve done for advisors. We believe in this marketplace and we want it to grow," he said. "We hope that this re-energizes advisors, and that’s why we worked together as an industry. A lot of companies have dedicated a lot of time and resources to this."
"In our industry, we are all good at growing market share by lowering the rates of our products, by coming out with different features and benefits, and those types of initiatives," added Mr. Dawson, saying it wasn’t accurate to imply that benchmarks would prevent insurance companies from being innovative or differentiating their products. "We are all extremely competitive. But we want to do it through initiatives that have true value to consumers, so through riders and things like that, not through confusion through differences in definitions."
At least one committee member, however, appears to be keeping its options open. In an email to The Insurance Journal, Cameron Walker, manager of risk product marketing at Empire Life suggested that the Kingston, Ontario-based insurer may not adopt each and every definition.
"We will be integrating most of the definitions put forth by the committee," said Mr. Walker. "Any definitions we currently use that we consider more favourable to our clients will not be changed at this time." But when asked to specify which definitions the company plans to keep, he declined to comment. "We are currently in the process of finalizing our plans with an implementation date of June 2008. Until our contracts have been finalized, I cannot comment on which definitions will or will not change at this time."
Steve Carter, senior vice-president of marketing at AIG Life also told The Insurance Journal that AIG would be rolling out the definitions as part of a software release scheduled for June 9, and that all of AIG’s new CI policies would reflect the new covered condition definitions. In addition, he says AIG is introducing a new 15 Pay Living Benefit term to 100 CI plan as part of this release.
"As was the case in the U.K., we believe that by removing some of the uncertainty surrounding differences in definitions from one contract to the next, this will build confidence in selling CI insurance for more advisors and broaden the market," he said. "Of course, this strategy will only be successful if all of the key CI insurance providers adopt the new definitions."
The insurers are expecting the benchmarking project to be successful, and are anticipating a jump in CI applications once the benchmarks are rolled out. But none of them were prepared to name a specific target amount in premium or policy count.
Ms. Tremblay does warn it would be unrealistic to expect the kind of surge that took place the British market after standard definitions were introduced. "We expect an increase in sales, but not that much. One challenge we face in our industry is the aging population of the sales force," she comments, but she says she does look forward to having more resources to devote to training. "We will have to make efforts to move advisors who work mainly on [asset] accumulation and say, ‘Hey, don’t forget asset preservation!’"