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.
\u201cThe 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,\u201d says Lawrence Geller, president of L.I. Geller Insurance Agencies Ltd. <\/b> in Campbellville, Ont. \u201cCanadians are used to buying guarantees.\u201d 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<\/b> in Victoria, adds that CI prices are \u201crelatively cheap\u201d 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. \u201cEveryone wants coverage for more and more conditions, which comes at a price,\u201d says Sean Long, health products consultant with Desjardins S\u00e9curit\u00e9 Financier<\/b> 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\u2019s higher cost but provide only \u201cemotional comfort,\u201d 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 \u2014 that is, fewer conditions covered \u2014 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. <\/b> and president of the Toronto actuarial and marketing consulting firm Actel Resources Inc. <\/b>, says the cost of CI insurance went up about two years ago when \u201creinsurance companies got nervous about full guarantees.\u201d 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 \u2014 wholly or partially \u2014 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.
\u201cThe industry has gotten a little ahead of itself, in terms of the features and complexities of CI,\u201d Mooney says. \u201cA lot of products are competing for attention, but it makes sense to have simple products.\u201d 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: \u201cWhile CI is a solution to a need, need is compromised by affordability.\u201d
Or, as Geller puts it: \u201cOnly the most affluent clients can buy as much CI as they want.\u201d
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. \tIE<\/b>
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