Why isn’t group critical illness more popular?
Critical illness (CI) cover, which provides employees with financial support when they are diagnosed with a specific critical illness or need a major operation, is better than it’s ever been: it’s easy to understand, simple to administer and flexible. At the same time, it’s widely underutilised as an employee benefit.
Statistics from Swiss Re’s Group Watch (2018) show that in the group protection field around 10.4 million people in the UK have life cover provided through their employer’s workplace benefits, whereas only approximately 900,000 have critical illness cover.
Life insurance has the big advantage of being widely understood by employees, giving it an edge in an age of financial complexity. Almost every adult knows what it does and how it works; providing valuable financial support for families and loved ones should the worst happen.
CI and present bias theory
Let’s compare life insurance with a CI tax-free lump sum. With CI, employees can reduce a mortgage loan, pay for essential home modifications, pay for the costs of care and treatment or use the money as an income. Behavioural economists tell us that people have ‘present bias’. This means that they give stronger psychological weight to payoffs which appear closer to where they are in life right now, rather than something that will inevitably happen at some point in the future. And people like to win; they like a ‘good deal’ and in this context CI provides the prospect of triumph over adversity.
So why isn’t CI cover more widely used and popular? One of the key reasons is that CI is effectively a ‘new kid on the block’ – protection products take time to get established with the wider public.
Reason 1: CI is a relatively young product
Group life insurance started in the workplace around 2,500 years ago in Greece, when members of occupational guilds pooled their hard-earned drachmae with the aim of financially supporting widows and orphans in the event of a guild member’s untimely death. However, CI’s lifespan can be measured in decades, compared with life insurance’s millennia.
The CI concept was originally developed in South Africa by the respected cardiac surgeon Dr Marius Barnard, who persuaded insurance companies that restoring the finances of those fortunate to survive ‘dread diseases’ and major surgery made good sense.
Reason 2: CI cover had a difficult start in the UK
The first CI policies were issued in 1983 and reached the UK in the early 1990s, which wasn’t the best time to launch an innovative protection product for several reasons, the first of these being the tougher regulatory climate. Opportunities to communicate CI creatively to the wider public (‘it’s life insurance, but you don’t have to die to get it’) were impeded by the compliance environment that emerged from the market reforms of the previous decade.
The next sticky issue to overcome was a recession, complete with punitive interest rates, high unemployment and a lengthy residential housing market slump, in which opportunities to sell critical illness cover with mortgages were limited. This meant that the CI concept didn’t get any real traction – essential for a new product – until the residential property market recovered at the end of the millennium.
Reason 3: CI and first-time homebuyers
The first-time homebuyer has always been an essential driver for CI: customers are younger, the premiums are more affordable and they are more receptive to innovation. But in recent years residential house prices have soared and younger people have found it more difficult, if not impossible, to get on the UK housing ladder. The result is that the average age of first-time buyers has dramatically increased.
Today, when a first-time buyer has parted with their house deposit, Stamp Duty and other essentials, a CI policy can seem like an extravagance. Once again, the UK’s economic dice have rolled against CI’s fortunes.
CI in 2018: mature, fitter and stronger
Over the years, CI products have increased the range of pre-defined conditions and diseases which can be covered, and offer employers a wide range of options when used with flexible group protection arrangements.
In September, the independent Financial Services Consumer Panel, which represents the interests of consumers for the regulation of financial services, released its report Understanding the protection gap (2018) highlighting the lack of innovation in the insurance protection market over the past three decades. One of the panel’s findings was that: ‘Lessons can be learnt from critical illness products, which seem easier for consumers to understand. Pre-defined conditions and one-off lump sum payments bring the peace of mind consumers want. They also perceive critical illness cover provides value for money.’
To sum up, in 2018 we find CI in better shape than ever before, providing more reasons to include CI with group protection packages and flexible benefit arrangements.
The author is Steve Browning, Aviva group protection proposition manager, Aviva.
This article was provided by Aviva.
Aviva is sponsoring REBA’s Innovation Day, taking place on 22 November at County Hall, London.
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