The cost of critical illness insurance has risen by about 25% over the past two years, putting adequate coverage out of reach for many Canadians. Yet many insurance professionals contend the cost increase is justified, given the guarantees the product provides.

“The price of CI may have gone up beyond what people are willing to pay, but it is still not high enough to keep the product viable for insurers,” says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. in Campbellville, Ont. “Canadians are used to buying guarantees.” And it is the cost of those guarantees that has sent the price of CI insurance higher.

Alphonso Franco, president of the Critical Illness Insurance Centre in Victoria, adds that CI prices are “relatively cheap” compared with other insurance products, although prices may be perceived as being higher than they should be. He believes the recent price increases are justified, based on the guarantees provided by the product.

CI insurance also provides a number of bells and whistles, such as return of premium and access to medical expertise around the world, which drive up the cost.

The number of illnesses covered is another factor. When CI insurance was introduced in Canada about 10 years ago, most policies covered, on average, five major illnesses. Today, as many as 24 illnesses are covered. “Everyone wants coverage for more and more conditions, which comes at a price,” says Sean Long, health products consultant with Desjardins Sécurité Financier in Toronto.

Long questions whether it is necessary for CI insurance to cover so many conditions. He argues that 97% of all CI claims are based on five conditions: heart attack, stroke, cancer, bypass surgery and multiple sclerosis. There are as many as 19 other conditions covered, which contribute to CI insurance’s higher cost but provide only “emotional comfort,” based on statistical evidence.

That is the dilemma insurers and advisors face. Individuals want to be sure they are covered for as many conditions as possible, even though the probability of becoming critically ill from some of the covered conditions is relatively small.

Geller argues that, while it might be easier to sell a cheaper policy that has fewer guarantees — that is, fewer conditions covered — there are risks to such a strategy. If a client becomes critically ill from a condition not covered by their policy, an advisor might be sued for not selling the most appropriate policy. In addition, the client might replace the policy by purchasing a product that covers more conditions from another advisor.

Long says the risk of a lawsuit can be avoided by making full disclosure to the client. Geller, however, wonders if it is possible to make full disclosure that will stand up in court.

Reinsurers are also a factor. Gary Mooney, vice president of business development at Montreal-based re-insurer Optimum Reassurance Inc. and president of the Toronto actuarial and marketing consulting firm Actel Resources Inc. , says the cost of CI insurance went up about two years ago when “reinsurance companies got nervous about full guarantees.” They then re-evaluated their exposure to potentially higher payouts of claims, the probability of increased legal and litigation risks, and lower product profitability.

Incidentally, reinsurance companies typically insure the risks — wholly or partially — assumed by insurance companies that issue CI policies or contracts. While the insurance company or primary insurer is responsible for all claims arising from policies issued, they use reinsurance companies to reduce their risk exposure to and financial liability for potential claims. This allows primary insurers to increase the amount of insurance coverage they can issue in a particular category without overextending themselves.

“The industry has gotten a little ahead of itself, in terms of the features and complexities of CI,” Mooney says. “A lot of products are competing for attention, but it makes sense to have simple products.” That is not the case, however, in the CI market.

For many individuals, buying CI insurance comes down to a trade-off among needs, wants and affordability, says Franco: “While CI is a solution to a need, need is compromised by affordability.”

Or, as Geller puts it: “Only the most affluent clients can buy as much CI as they want.”

Given the guarantees provided by CI insurance, its cost will remain high unless there are structural changes to the product. Long says such changes must address the level of guarantees and limits of coverage. Reducing the number of conditions covered to those that are statistically most probable and capping the payout limits may make it possible to provide a more affordable product. IE

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