More than ten years ago, one night after the pubs had closed down, two British insurance executives went out for some fast food. The U.K. insurance industry would never be the same.
Roger Edwards and his colleague Nigel Bradshaw were out for a burger and asked themselves why insurance couldn’t be as conveniently packaged as food. “We noticed it was cheaper to buy a Whopper meal deal than order your burger, fries and fizzy drinks separately, and wondered whether the same principle could apply to protection,” he told the British Health Insurance magazine in an interview last year.
Mr. Edwards and Mr. Bradshaw took their idea back to their employer, Scottish Provident, and in 1996 the company launched its Self Assurance product. It allowed clients to mix and match renewable term life insurance, critical illness insurance (CI) coverage, and disability benefits inside of one policy.
To say that the Self Assurance product was well received is something of an understatement. By 2000, independent financial advisors in Britain were placing an average of about 3,000 Self Assurance policies a week, and 60% of all sales included critical illness protection. Largely thanks to this product innovation, Scottish Provident’s share of the protection market went from five to 30% in less than four years.
The Canadian marketplace may not be in the throws of a similar packaging revolution, but some insurers certainly are thinking about how they can better combine their term insurance and critical illness products into a tasty combo that will appeal to advisors and clients alike.
Take AIG Life Canada as an example. The insurer decided to add a CI option to its term life insurance plans in May of last year. “We were getting some inquiries interested in offering CI riders on term,” explained Stephen Carter, AIG’s senior vice-president of marketing, in an interview a few months after the product was launched. “We thought that was a great way of packaging mortgage protection as well.”
The product, called the Mortgage Insurance Solution, is aimed primarily at the younger market. It is available on both a single and joint first to die basis, and offers a combination of T-10 or T-20 with a living benefit critical illness rider of corresponding length. Twenty-five conditions are covered, and there is a return of premium feature that refunds 100% of the premiums if clients do not make a critical illness claim. After 15 years, clients also have the option of reducing their critical illness coverage to match their lower mortgage balance and will receive a partial refund of premiums.
AIG, however, is only one of the most recent entrants into this segment of the insurance business.
Competing against creditor insurance
Industrial Alliance is going after the same market with its Home Protection Plan, a term policy with a face value that decreases along with the size of the client’s mortgage. The product is clearly designed to compete with the creditor’s group insurance offered by the banks, and the insurer has distributed a detailed comparison sheet showing how its product stacks up against all of the traditional lenders. The policy offers a disability benefit equal to half or all of the client’s monthly mortgage payment, as well as a critical illness rider covering 20 illnesses.
Standard Life Canada allows brokers to add its Protecta critical illness insurance riders to its T-10 and T-20 life policies, either at a basic level covering four illnesses, or enhanced coverage that protects against 24 critical conditions. The CI term is available in 10 year steps with automatic renewal, or with level premiums to age 65 or 75. The 10 year CI rider is convertible to any level premium critical illness insurance product until age 64.
Three in one product
Assumption Life entered the fray in March of 2006 with FlexTerm, which is available in 15, 20, 25, 30 and 35 year terms. It combines life, disability and critical illness coverage in one policy. Applications are submitted online and go through simplified underwriting. The disability benefit is capped at one per cent of the life insurance amount, to a maximum of $2,500 and the maximum critical illness coverage is set at $100,000. Life coverage can be converted to permanent plan without proof of insurability before age 65. Another product, FlexOptions, offers similar coverage but with a decreasing face value.
Desjardins Financial Security (DFS) has also been a player in the combined term life and critical illness market for several years. Its Enhanced T-10 with its Critical Illness Advance product consists of a 10 year life policy, accompanied by a critical illness benefit equal to at least 25% of the face amount of the policy, up to a maximum of 100%. Benefits are paid on whichever occurs first, death or critical illness. Should the client be diagnosed with a covered critical condition and the entire benefit is paid, the life policy will terminate. Otherwise, any residual amount is paid at death.
While the Canadian housing market may be cooling off slightly, that doesn’t mean the opportunities to sell this kind of coverage are drying up. As Nathalie Tremblay, head of health products at DFS, commented in her presentation at The Insurance Journal’s Insurance and Investments Convention last fall, advisors should be offering critical illness coverage in tandem with term life coverage when clients are in their thirties and in good health. By doing so, they can fill an obvious need and avoid some of the frustrations they face when trying to place CI business in more mature cases. “When I see the kind of performance that’s taken place in a country like England, I ask myself, ‘Why not us?’” said Ms. Tremblay.
Ms. Tremblay isn’t alone in wondering why advisors aren’t selling more critical illness to cover mortgage needs.
Guylaine Gauvin, director of sales and development at Assumption, says that the insurer’s sales have doubled over the last four years and attributes most of that success to the FlexTerm and FlexOptions products. She says they’ve worked well as a door opener and helped introduce the company to brokers across Canada. However, most of their life policies are still issued without the CI component. “It’s underdeveloped,” she says. “The Canadian population is not as willing to invest in this kind of product.” Advisors haven’t been selling truckloads of CI on AIG’s mortgage protection plan either. While they have seen an uptick in the sale of critical illness riders on term policies, penetration is still only around five per cent.
Mr. Carter of AIG suggests advisors look to the banks, and the fact they’ve already demonstrated the potential for combined mortgage life and CI coverage. “I believe that some banks get up to 60% penetration on mortgage life and up to 30% on mortgage critical illness. True, they have an advantage in filling an important need right at the time of the home or mortgage purchase, but the important point here is the need,” says Mr. Carter. “Brokers are leaving money on the table by not taking the opportunity to cross-sell critical illness.”
Like their competitors, Standard Life reports that very few of their term policies have been issued with critical illness. Gerry Anthony, senior consultant, product development at Standard notes that the cost of term CI, even for the base coverage, is double the cost for the same amount of term life insurance. “It is difficult to add a rider that costs more than the underlying coverage to which it is attached,” he says. “Term purchasers are very cost conscious.” He also mentions that adding CI to an application causes delays due to additional underwriting requirements, which may put brokers off.
Mr. Anthony thinks that, properly packaged, a combined product could become just as popular in Canada as in the U.K., but before that can happen, the industry needs to find a way to overcome some of the negative perceptions about CI coverage and the payment of claims. “Finally, we need to improve the way we communicate the benefits of CI coverage, both as a rider to a term or other life policy, and as a stand alone contract, both to advisors and the buying public.”