Both critical illness cover and private medical insurance are failing, for different reasons, to attract customers Nick Telfer explains why.

The imperative for the development of critical illness cover throughout the world has been the increased life expectancy of those who suffer from what would, in the past, have been fatal conditions.

Medical advances have dramatically improved the life expectancy of heart attack, cancer and stroke victims. For them a pure life assurance policy was of limited benefit. Their need was cash now, to minimise the financial trauma that serious illness inevitably causes.

The great appeal of critical illness insurance is this guaranteed pay-out on claim, irrespective of the impact of the condition on lifestyle or finances. Unlike income protection insurance there are no complicated benefit calculations. When presented correctly the concept is easy to understand and the benefits are clear.

Despite the fact that industry claims statistics show that the vast majority of claims are paid, consumer trust in the critical illness proposition is being eroded by a steady stream of examples of disgruntled policyholders whose claims have been declined. The inevitable consequence of this is that consumers are being dissuaded from prudent protection planning leaving them open to the financial cost of serious ill health.

As publicity of declined claims can be detrimental to consumer confidence, so publication of the positive stories from successful claimants can be constructive. Raising the profile of the positive aspects of critical illness insurance is something the critical illness industry must address in unison through the education of both consumers and advisers.

The long-term future of the critical illness market hinges on two major factors. First, consumer and adviser trust are fundamental to promoting an intangible proposition such as insurance. Second, critical illness insurance must evolve to continue to meet the increasingly sophisticated and demanding needs of modern consumers and advisers.

Complex insurance

While critical illness cover is a straightforward proposition, understood by all, private medical insurance (PMI) is arguably one of the more complex consumer insurances. It is also one of the least used, with only around two million people estimated to be covered by personal plans.

Perhaps the biggest threat to the PMI market is an improving NHS which allows consumers to defer making a decision to purchase PMI, as they prefer to settle for something which is flawed, but which they have already paid for.

If waiting lists continue to reduce and the NHS increasingly looks to providing treatment and accommodation in private facilities through public-private initiatives, two of the main appeals of the PMI proposition are diluted and providers will find it harder to justify the cost of their offerings.

Recent years have seen innovations in PMI product design as providers attempt to increase the appeal of the proposition while keeping premiums affordable.

Restricted procedure plans such as those offered by providers, such as HealthNow, limit cover to certain predefined treatments. Using this approach actually manages customer expectations far better by focusing on what is included in the cover rather than what is not.

Norwich Union Healthcare, First Assist and Health On-Line offer a menu of benefits which give consumers the flexibility to construct their policy to meet their concerns and budget.

Freedom HealthNet has taken a slightly different approach, paying benefit direct to the insured, allowing them to either arrange treatment privately or through the NHS.

A growing number of providers are recognising that there are consumers prepared to contribute towards the costs of their medical treatment, provided that their exposure is capped and that the insurer will share some of the costs.

While each of these innovations is designed to reduce the cost of what is, in its traditional form, a luxury product, it is possible that the industry needs to look to integrate their proposition with other financial products to produce holistic health management propositions.