The independent financial research company also said its research indicates that in the last year providers made 11 enhancements to existing critical illness propositions.
It said these product developments confirm the trend towards enhanced definitions (ABI+) and away from reliance purely on the number of conditions a policy covers.
Defaqto research also indicated that the pace of increase of the number of conditions policies cover has slowed dramatically in recent years.
Since March 2009, the average number of conditions covered has increased by just two, from 34 to 36.
A Defaqto survey found that 72% of intermediaries favoured better definitions over a high number of critical illnesses.
Ben Heffer, Defaqto's insight analyst for life and protection, said: "The challenges facing the critical illness market are those facing the protection market generally, namely low penetration, lack of value for the industry and dented customer confidence.
“The need for protection is as great as ever, but the key issue is how much capacity or appetite advisers have to reach out to people beyond their traditional client base to increase protection sales. The opportunities are there - the key question is how advisers can take advantage of them.
"The most pressing issue for advisers is the need to position critical illness cover as a solution that offers real value to consumers in its own right, rather simply as an add on to life assurance.
“At the heart of this approach must be a focus on the features and benefits that policies offer and ensuring that they fulfill a clients' specific needs - rather than focusing on price or on finding the option that covers the largest range of illnesses.
“Only once consumers are re-engaged will advisers be able to convert the potential value of critical illness cover into tangible value for their business."
Defaqto has published a guide today which highlights the opportunities that critical illness cover offers advisers.
It provides guidance on how advisers can take advantage of the potential in this sector by making the need for critical illness cover real for their clients.
The guide aims to help advisers achieve this with a five-point plan for restoring value:
1. Position critical illness as a lifestyle protector, rather than simply a mortgage repayment vehicle
2. Sell critical illness and income protection as a package, to cater for both regular basic needs and to provide a lump sum to address capital needs
3. In the absence of income protection, sell high sums assured for income generation
4. Recommend a policy for your client based on the value of cover not simply the number of illnesses
5. Sell health - products that have health and wellbeing programmes encourage clients to live healthier lifestyles so that they may never need to claim; and some give premium discounts in return for improved health regimes
