Health check

The FSA has already found fractures in the critical illness sector and radical treatment will be needed to restore it to good health, says Simon Burgess

Critical illness providers are under the Financial Services Authority’s microscope and unless some changes are made it is not going to make pleasant viewing for the regulator. A recent bulletin from the FSA highlighted its concerns about the critical illness sector and made clear that it will not tolerate such issues in the future.

The FSA looked at the critical illness promotions of 25 providers and found among other problems, evidence of scaremongering, unsubstantiated claims on product and price, and general over-simplification.

The irony is that critical illness should be a simple product whereby clients can sign up, have a clear idea of their cover and have claims resolved quickly when necessary. But the reality is different. There is no standard level of cover in the critical illness market, making it impossible for consumers to compare policies effectively.

This is compounded by the use of different definitions for the illnesses covered. There is also the problem of excluded conditions, which again vary between providers and products. All this makes it impossible for anyone but the most experienced and best informed to successfully navigate the market.

While there is a need to have complex policies covering all manner of conditions and circumstances, this should not be at the expense of an industry standard covering a set checklist of conditions and diseases. The definitions relating to these must also be consistent for every provider.

Not only is there confusion about definitions used by providers but also in the level of understanding consumers have of the definitions. The Association of British Insurers has tried to standardise the definitions used and released a Guide to Critical Illness Definitions in November last year. But for consumers, there is still the problem of understanding what these definitions mean. This in turn means consumers face claims being turned down when they thought they were covered.

For example, if an individual suffers a disease that results in them losing their sight and being registered blind, this would not necessarily mean they are eligible for cover under a critical illness policy. The ABI’s guide states: “Blindness means completely losing all sight in both eyes where the condition cannot be cured and is expected to be permanent. Please note that being registered blind will not be a valid claim if the person still has some residual sight.”

It is difficult to believe there is a single consumer in the country that would Cnot expect a critical illness policy to pay out if they were officially registered as blind in such circumstances, and the conversation in which the broker tells the client this was not the case is not one in which any of us would like to be involved. Lines have to be drawn but where possible the potential for confusion has to be eliminated.

The same is true for the exclusions in place and it is imperative consumers know exactly what they are buying into. If there was a basic market standard all policies met, brokers could immediately advise clients if they are eligible or if something more specialised is needed. This would prevent unpleasant shocks down the line and let brokers provide a faster, more effective service.

The clearer and more consistent insurers can make the boundaries of their policies, the less chance there will be for consumers to be disappointed and providers attacked for avoiding paying claims. It is no surprise that critical illness insurance has such a poor reputation when there is no commonality in what the product offers. The sooner this is in place, the sooner the market can rebuild its profile.

Critical illness is often sold on the back of other products such as mortgages or as part of a financial package, and in principle there is nothing wrong with this. But it means that in many cases not enough time is given to explaining the levels of cover on offer, the exclusions that apply or the huge price differentials that exist between providers.

Do brokers, let alone their clients, have the inclination after a mortgage interview to sit through something similar for critical illness? In many cases probably not and so conversations relating to the insurance tend to be rushed through.

For example, 100,000 of cover over a 25-year period for a 31 year old non-smoking male is available from 23.70 (Scottish Provident) to 41.64 (Skandia Life). The difference in these monthly premiums is an alarming 17.64 which equates to 211.68 for the year and 5,292 over the period of the cover. BUPA offers a guaranteed monthly premium of 30.90 for the same individual and a mid-market alternative to the cheapest provider. In turn, this is 84.40 more expensive over a year and 2,160 more expensive over the 25-year period.

There may be differences in what each policy offers, which might explain some of the price differential but this takes time to investigate and requires “It is no surprise that critical illness insurance has such a poor reputation when there is no commonality in what the product offers”the knowledge of an experienced broker. Advisers trying to simply sell one of the limited selection of products they have access to on the back of a mortgage are not doing justice to what is available or the needs of their client. The door is open in many instances for client complaints and FSA sanctions.

For mortgage brokers looking to effectively sell critical illness on the back of a mortgage there are two options. One is to identify the need for the insurance and arrange a further appointment when the options can be discussed fully and the appropriate product selected. The other is to introduce the business to a specialist broker, ensuring the client gets the service required.

But if some forward movement is made on the basic level of cover, the definitions used and the exclusions made, it will make it easier for mortgage brokers to offer basic products to clients where appropriate, meaning they only have to refer the more detailed or specialist cases. This would both drive volumes and protect brokers from mis-selling the insurance .

The ABI is consulting with the industry on how to move forward with many of these ideas, but how long it will take for change to feed through remains to be seen. The ABI says it is looking to achieve three main goals. First, to improve clarity by introducing better information so consumers will see what is covered and when a claim is likely to be met. Second, to make the product sustainable and more affordable by ensuring that the illness definitions take account of future medical advances. And finally, to give companies the option of offering two levels of cover for cancer to make policies more affordable and increase choice.

Such clarity can only help and under the watch of the FSA the market is going to have to quicken its step to avoid sanctions . Following its review of the promotional activities the FSA said: “If we see persistent non-compliance from a specific firm, we will consider other regulatory tools – including a visit to look at the firm’s systems and controls surrounding their financial promotions or referral to enforcement for further investigation. Our focus on financial promotions is just one aspect of the ongoing work that the FSA is undertaking in relation to critical illness.”

Special attention is also being given to the sale of critical illness as a secondary product to mortgages. The FSA continues: “There is work underway to look at the way in which critical illness and payment protection products are sold during the mortgage sale process as part of thematic work on payment protection insurance.”

Providing for those struck down by serious and dehabilitating medical conditions is a serious business and there is no question of the need for critical illness insurance. It cannot be expected to provide cover in all cases and does not purport to do so. But if it is to be easily sold and understood, providers must create benchmarks of cover and definitions in their offerings.

While some may feel this will rob them of individuality, it is more likely to increase volume and mean those requiring specialist products will be catered for more effectively.

Hopefully, as the FSA continues to inspect the critical illness market it will find the stresses and fractures beginning to heal themselves and a stronger, healthier market emerging.