How should an adviser assess which Critical Illness policy they should offer to a client? Specialist protection IFA Alan Lakey outlines a new approach to product selection...
The protection world can be a rather insular place, a somewhat austere, almost Dickensian world where the inhabitants beaver away in a rather primitive fashion, often placing a greater emphasis on cost than on the practical aspects of the products.
In the area of wealth management, advisers frequently engage in stochastic modelling, tactical tilting and the use of multifarious asset allocation tools. By contrast, protection advisers consult premium lists and extremely basic catalogues of plan details where boxes are ticked highlighting some policy benefit or condition. All this can be rather archaic, sometimes unhelpful, potentially misleading and, frankly, unsatisfactory.
Protection is seen as the unattractive bedfellow of the glamorous investment brigade and adviser attitudes to protection research seem to confirm this. Recent surveys proved that the majority of advisers select on price rather than product quality. This is an unsound methodology, pointedly so in the case of critical illness. Lack of adviser knowledge feeds through and exacerbates the lack of consumer knowledge, something that the FSA's April 2009 Research Paper highlighted when commenting on consumer understanding.
In short, most advisers fail to adequately understand critical illness policies and the premium-focused contingent serves as proof.
The most important determinant of a ‘good' critical illness policy is its ability to meet consumers' reasonable expectations, which is to accept a claim and provide money when a critical condition strikes. While we cannot know what actual condition may occur, we can make reasonable assessments based on the various statistical information available. This enables an assessment of the worth of a particular condition and also the relative merit of one provider's claim definition against another.
Few advisers are medically trained, which leaves them unable to place an accurate value on any of the conditions covered. Most will be aware that cancer is the main cause of a claim but how many in the industry can confidently state that a plan including cover against Cardiomyopathy offers greater value than a similar one which includes Aplastic Anaemia or Encephalitis?
Furthermore, if a value can be gauged, how about the differences in the definition wordings. Is it likely that an accurate measurement of value can be delivered?
Gut-feelings
This problem has existed for many years as it appears that even with the best of intentions many of the product selections are based on approximate knowledge and gut-feelings. Frankly, this is a bit too vague.
This problem is further magnified by a lack of worthwhile or appropriate data. While it can be easily discovered that each year around 275,000 people suffer a heart attack the truly relevant information, such as their ages, sex and smoking habits, tend to be hidden away or are sometimes unavailable. Information on the prevalence of these conditions can be located fairly easily but it is the actual incidence that is needed to assess the potential for a claim. The majority of policyholders will be in the 25-65 age range so it is within these parameters that researchers need to focus.
For instance, most Bacterial Meningitis diagnoses relate to the under 25s, whereas most Prostate Cancers are in the post 65 sector, not usually a relevant market for CI insurance.
Nonetheless, there are potential claims trends based on increasing age and smoking status and if these can be understood and factored into the selection process a more favourable recommendation will be forthcoming.
Obtaining this information is also made difficult because competing expert bodies provide contrasting figures. In some instances only US figures may be available and, while useful, the
UK incidence experience is not necessarily reflective.
This is the task that reinsurers struggle with so claims figures were obtained from three major firms. These proved worthwhile but, again, there was a divergence which may stem from a limited claim base and the distorting effect of some conditions only being included in plans for a limited period.
Insurers frequently publish their claims statistics but even here there are large differences - 8% of Aviva's female claims have been for multiple sclerosis whereas it is only 2% with BUPA Individual Protection.
The basis of any quality research must start with the exhaustive report, A Critical Table, by Paul Brett and Johan Du Toit of GenRe, which sets out precise statistics for all ages, sexes and smoking status. For advisers, the major drawback is that not all CI conditions are included. Additionally, it is based on claims paid which is not the same as likely incidence, and potential claims. Conversely it does add the reality of selection that pure statistics may understate.
So, what is the point of all this? It can be argued that any protection adviser should acquaint themself with sufficient knowledge to be able to assess the most appropriate plan based on his client's potential to claim. Some assessments may be obvious, such as a plan offering Mastectomy cover not being relevant for a male and vice-versa with early stage Prostate Cancer, but there are subtleties involved as well which need to be factored in, where some condition claims definitions are superior and more likely to result in a successful claim.
Subjectivity and assumptions
There is much subjectivity and assumption involved and this cannot be helped, however, despite this potential for distortion, any resulting opinion will be worth more than the current basic selection process.
What insights can be gained from this research? Unsurprisingly, those providers offering wider cover and more favourable definitions for cancers and heart disease tend to show as more beneficial than those with more basic contracts. The differences are more marked with smokers and become more obvious at older ages, Nothing revolutionary here, but it does confirm that some plans are irrefutably superior to others and are therefore more deserving of attention.
Using my system AXA, BUPA and Fortis can always be seen as more likely to result in a successful claim than Scottish Widows, Lincoln or Friends Provident, although other factors such as underwriting and claims philosophy will come into any selection process.
The reasons for this divide can be traced to areas such as inclusion of Mastectomy for DCIS, Coronary Angioplasty, Open-heart Surgery, Diabetes and Early-stage Prostate Cancer. The potential for these conditions to manifest themselves is appreciably higher, and counts for more than the addition of conditions such as Encephalitis, Aplastic Anaemia and Supranuclear Palsy.
[asset_library_tag 1033,Tables one and two] show the ratings for female and male smokers in the 45-54 age range. The scores accorded are based on the possibility of the condition resulting in a claim and have been adjusted by my own view of the merits of each providers condition wording. These are abridged tables due to the constraints of space.
Favouring younger lives
One matter worthy of comment is that some contracts appear more favourable to younger lives but an adviser acting on this information could still select incorrectly. If provider A shows as top choice for a 30-year old but shows lower down the table at ages 40 and 50 should it be the selection or should it be the provider that looks best at age 40 or 50?
Most contracts run for 20 years or more and illnesses are often more likely to reveal themselves in later years so this presents an interesting dilemma to which there is no perfectly correct answer.
Rating the various condition wordings is clearly subjective and it has to be admitted that there cannot be any truly accurate method of weighting differing wordings. Nonetheless this is a start and the concept can be fine-tuned as further data becomes available and as claims statistics become more widely available and reliable.
One of the best examples is coronary angioplasty. Ignoring the substantially different PruProtect plan, only four providers continue to include this condition which previously was made widely available in the 1990s. BUPA and Direct Line will both pay the full sum insured, whereas Lincoln and Skandia limit claims to £10,000, although a claim under the Skandia version will not reduce the sum insured.
Angioplasty operations were not carried out until 1991 and official statistics show that in 1992 only 11,500 operations were carried out compared to 19,200 artery by-pass operations. By 2007 angioplasty outscored by-pass by 77,300 to 25,300. Around 34,000 of the angioplasty operations involved two arteries, a requirement for a successful claim. Not only is the inclusion of this condition important but the increasing use of this technique means it is of increasing importance.
Hopefully this qualitative research will catch on and advisers will shift away from condition counting, premium chasing and knee-jerk assumptions.
Alan Lakey is principal of Highclere Financial Services
[asset_library_tag 1033,View tables one and two]
