Special Report on Private Health: Critical illness premiums fall: Competition leads to lower charges, writes Alison Eadie

CRITICAL illness cover, which pays out on diagnosis of specified diseases such as cancer, kidney failure and multiple sclerosis, is one of the newest and fastest growing areas of health insurance. It appeals particularly to the self-employed, who might otherwise be without income if forced to take several months off work.

By the end of last December there were 539,000 policies in force, after 240,000 new policies in 1993, a 41 per cent increase in sales over 1992. The figures come from the annual critical illness claims survey by Employers Reassurance International, the largest reinsurer of UK critical illness policies.

It found the total payout since critical illness was introduced in the late 1980s to the end of 1993 was pounds 53.2m, averaging pounds 30,000 each to 1,773 claimants. Cancer accounted for 48.8 per cent of claims, heart attacks 28.1 per cent and strokes 10.4 per cent.

Sales are continuing to boom and there are now estimated to be about 75 providers in the UK market. Mick Furie, general manager of Employers Reassurance, said, 'All the signs are that critical illness is set for a major takeoff in the next year. Standardisation of definitions in respect of core diseases has helped remove some of the ambiguity which existed in some of the earlier contracts.'

The newness of the market means there is little actuarial data on which to base prices. Kevin Pearce, senior marketing consultant at Allied Dunbar, said the firm's claims experience was better than predicted and a reduction in premiums next year was a possibility. It last brought prices down in January 1993.

Abbey Life has the greatest claims experience, having paid out 657 claims worth pounds 20.4m, excluding death claims, to the end of June this year. In common with many insurers, its critical illness cover includes life assurance, so it pays out either on diagnosis or on death.

Stand-alone critical illness policies, which cost less than policies linked with life insurance, stipulate the policyholder must survive for a specified period after diagnosis - often 28 days - to ensure claims are met. According to Employers Re, about 21 per cent of critical illness claims have been declined, the principal cause being misdiagnosis or failure to meet the policy definition.

Policies can also be for the whole of life or for a fixed term, often until the policyholder retires or has paid off his or her mortgage.

For pounds 100,000 of cover a male non-smoker aged 35 years would pay pounds 89.20 a month for an Allied Dunbar Lifestyle Plus policy, which includes whole of life cover. A female would pay pounds 70.40 a month. For pounds 50,000 of cover the same male would pay pounds 46.25 and the female pounds 36.85 per month.

Growing competition between insurers means there are several variations in the cover provided. Swiss Life, which entered the market in June, claims its Critical Illness Plus plan is the first ever to guarantee premium rates for the full term of the policy.

Scottish Amicable European, which launched its Flexible Critical Illness Plan also in June, believes the cost advantages of its Dublin base make for highly competitive premium rates, giving policyholders the prospect of limiting the payment term and making policies self-funding in the final years or receiving a higher level of cover.