Critical illness coverage reaches tipping point

An increase in the prevalence of high deductible health plans and health savings accounts has made employees more aware of their group medical costs than ever before. At the same time, employer compliance with tighter plan design restrictions under the Affordable Care Act spotlights the need for a financial backstop to help pay for catastrophic claims. This is especially true since the ACA last year ended annual and lifetime benefit caps.

While industry experts say critical-illness insurance offered on a voluntary basis can plug that coverage gap, there’s still a need for greater awareness of this product, which often is confused with other benefits. “If your employees aren’t aware that the product exists or don’t really know what it is when they see their list of benefits, they’re not going to elect it when given the choice,” cautions Karen Terry, assistant managing director of insurance research at LIMRA.

Also see: “A ‘lost opportunity’ in critical illness.”

While advances in medicine are helping more patients survive critical illnesses, nearly half of U.S. households have insufficient savings to cover a major medical condition, observes Steve Rowley, a VP at Gen Re, a Berkshire Hathaway Company, who suggests CI can make the transition to greater cost-sharing more palatable for employees.

“We’re now facing a perfect storm,” he says. “Today, more than 42 million people in the U.S. have some sort of unpaid medical bill. Simply put, many Americans have to choose between survival and bankruptcy when they are diagnosed with a critical illness, even when they have a medical insurance.”

Competing with cancer insurance

This heartbreaking choice has placed growing attention on CI insurance, which was developed by Marius Barnard, a South African cardiac surgeon, and introduced in 1983. It did not take hold in the U.S. until the late 1990s, but all these years later, it’s as relevant as ever at a time of widespread critical illnesses across the nation.

Bonnie Brazzell, VP of Eastbridge Consulting, notes that last year served as a tipping point for voluntary CI sales, which finally overtook cancer insurance. “We’ve always said for many years that critical illness will eventually outsell, if not replace, cancer insurance,” she says.

Also see: “The one thing CI producers are ‘all clamoring for.’”

But that’s not to suggest cancer insurance will disappear as CI soars. Those products typically have indemnity benefits to cover many different expenses that could arise, featuring potentially much higher payouts than typical CI plans for serious cases requiring treatment over a period of six or 12 months, Brazzell says. She also doubts producers that have been selling cancer insurance for years and have seen dramatic payouts will abandon this line for CI.

“Those people are more likely to continue selling their cancer plan if that’s what the employee wants,” she believes. “They may add on critical illness, minus the cancer benefit, because a lot of critical illness products are structured so that the cancer coverage is optional for that very reason.”

CI’s voluntary benefits growth climbed 19% in 2008 before skyrocketing 88% in 2009 (skewed by a very large account with enormous enrollment) and tanking to -10% in 2010 when all voluntary benefit sales were down, according to Eastbridge Consulting research. The product line then recovered and remained steady by posting growth rates between 2011 and 2014 of 24%, 17%, 11% and 20%. CI sales soared to $392 million in 2014 from $120 million in 2008.

Also see: “Sun Life strives for ‘holy grail’ of voluntary benefits with Assurant acquisition.”

In stark contrast, the same research shows cancer insurance offered on a voluntary basis has waned or flattened since 2008 when the product line posted a 6% increase in annual growth. Lows of -8% were reported both in 2009 and 2010, followed by increases of 5% and 3%, respectively, in 2011 and 2012. But then the product plummeted 18% in 2013 and -4% in 2014. In addition, sales tanked to $343 in 2014 from $473 in 2008.

Most CI products offer some form of cancer coverage with the option to exclude cancer-specific coverage if needed for health status or other factors, according to the 2015 LIMRA U.S. Critical Illness Insurance study.

At least 90% of sales in the dread-disease category involve cancer insurance, LIMRA notes. However, the research shows that cancer sales have been flat relative to CI, whose compound annual growth rate was 21% for the past three years. In addition, voluntary CI premiums have been increasing by 17% over the past decade. Ron Neyer, associate research director at LIMRA, describes that figure as “quite remarkable.”

Also see: “Fastest-growing ancillary carriers with over $500M in revenue.”

Tim Weber, who heads Mercer’s voluntary benefits practice, also has seen a significant uptick in CI offerings in the enrollments the consulting firm has handled on behalf of corporate clients. He has noticed that “a significant portion” of those plans include transitioning to CI from cancer coverage. Cancer insurance sales historically targeted individuals with an occurrence of cancer in the family, Weber says, whereas CI policies would be more positioned around covering the unknown.

As specialty insurance carriers become more adept at underwriting additional diseases, he believes CI could represent “the next evolution of cancer plans” because the product covers a broader set of diseases and can include cancer coverage.

Jeanne Reynolds, a spokeswoman for Colonial Life, says the pricing structure is different for these two products. Major cancer insurance carriers, for example, offer composite-rated products whose premium rate is the same for all ages. CI typically uses an age-banded approach that charges less for younger policyholders and more for older policyholders.

Also see: “Fastest-growing ancillary carriers with $100-$500M in revenue.”

With regard to underwriting differences, she notes that individual cancer insurance is typically not guaranteed issue. “At Colonial Life, we’re more likely to offer critical-illness insurance on a guaranteed-issue basis, with account participation requirements,” she says.

Wide-ranging coverage

Covering a broad range of disease states with the prospect of multiple payouts over the life of a policyholder represent two major selling points of CI plans. The average group or worksite CI voluntary product covers 19 conditions, according to a 2015 survey by Gen Re, which also found the product’s sales increased 15% from 2013 to 2014. Rowley also says the CI industry has posted growth in nine of the past 10 years.

Most CI plans pay a lump-sum benefit upon diagnosis of a covered condition, with typical face amounts ranging from $5,000 to $30,000. The most common categories combine various conditions. They include heart attack, heart transplant, stroke, bypass surgery, angioplasty; as well as major organ transplant, renal failure, Alzheimer’s, paralysis, loss of sight, severe burns, benign brain tumor, and coma.

Other categories include optional cancer coverage, as well as childhood diseases such as cerebral palsy, Type 1 diabetes, congenital heart and structural defects, genetic disorders (e.g., Down syndrome, cystic fibrosis and muscular dystrophy), and congenital metabolic disorders.

Also see: “The myth about ‘mandatory participation’ in voluntary benefits.”

What’s also noteworthy is that CI plan design has evolved from a one-time payout and policy termination to multiple payouts involving “recurrence” benefits that cover treatments spread across a number of years, according to Brazzell. So theoretically, she says an insured could collect benefits from a heart attack and then a stroke or cancer years later if they’re unlucky enough to be stricken with multiple serious ailments.

The number of private employers with at least 10 employees offering CI more than doubled to 27% in 2014 from 12% in 2002, LIMRA has found. During that time, the research also shows the number of employers partially funding those benefits more than tripled to 30% from 9%, with the lion’s share offered on a voluntary basis.

Average participation in a CI product is usually in the high teens to 20% range, which Neyer notes is on par with other voluntary offerings. To grow the product further, he says the industry needs to do more educating employees about the value of such coverage.

Also see: “The voluntary benefit that’s addressing a major employee concern.”

Many new carriers, especially group writers, have entered the CI market over the past several years. In 2005, only 36% (or 12 of 33) of participants in LIMRA’s U.S. Worksite Sales survey offered this coverage, which swelled to 67% (or 31 of 46 carriers) by 2014.

Communication challenges

One key trend is that CI plans are now almost always being offered in conjunction with core medical benefits as supplemental coverage rather than an off-cycle event, according to Weber. He says employers are now faced with the challenge of having to articulate the value of their entire benefits offering with increases in major medical deductibles and any accompanying perceived diminished value in the eyes of employees.

For employees, he sees the use of increasingly sophisticated decision-support tools as a significant development in helping them make wiser choices at enrollment. For example, a pop-up window may suggest CI to plug coverage gaps for those who click on a high-deductible health plan, or at least guide someone through a decision tree that forces yes-or-no on answers to questions involving every aspect of the benefits offering.

Also see: “5 tips for ADA compliance.”

Selling CI plans on a voluntary basis may appear easy given its rising value proposition, but only if prospective policyholders first understand what they’re about to buy. “The bottom line for critical illness is employees don’t necessarily understand what critical illness does for them and how it fits into their overall benefits package,” Brazzell explains.

“So without any education,” she continues, “somebody might say, ‘I already have disability, life and medical insurance. Why do I need this stuff?’ The important thing for [employers] to do is to tell the story as to where a critical illness type product fits into someone’s overall benefits program.”

Bruce Shutan is a Los Angeles-based freelance writer.