Total and Permanent Disability (TPD) is causing so much hassle in the industry, that this month Anthony Burpitt goes back to basics
If there’s one thing that’s well understood about Total and Permanent Disability (TPD), it’s that it’s not well understood. At least by our customers anyway.
Many consumers incorrectly assume that TPD will pay out if they are unable to work due to health implications. In fact, TPD only pays out if the claimant is ‘totally’ (not partially) unable to carry out agreed tasks (maybe the ability to do their job), and more importantly that this situation is ‘permanent’ – ie irreversible.
Problems with TPD
Although a well intentioned ‘catch all’, the problem with TPD is that it’s much more subjective than claims from the listed conditions. It’s easier to say that someone has suffered from third degree burns covering 20% of the body’s surface area, than it is to say that they are unable to carry out a selection of tasks (perhaps defined by the ability to do their job), and that the situation is going to be irreversible.
Because of the subjectivity around the eligibility to claim under TPD, it is perhaps unsurprising that over a third of all TPD claims are turned down by insurers because the illness or injury does not meet the definitions of TPD.
The ABI has acknowledged that TPD needs to be reviewed in order to bring clarity and confidence to critical illness policies.
In recent months, as part of a general review of the CI statement of best practice, the ABI has asked insurers, reinsurers, advisers, members of the medical profession and consumer groups for input in coming up with a better TPD proposition. One idea that has been considered in detail is to create standard wordings for some of the types of illnesses that are typically submitted as TPD claims.
Of course, if we were to end up with a set of definitions for the most typical causes of claims under TPD, we would still have to consider what we do about even rarer causes of claim. Surely we can’t keep on adding more and more definitions to CI policies (can we?) without a policy document looking like a medical encyclopaedia. So, is the answer to leave some form of catch all in the definitions after all?
To make sure that the industry gets this right, the ABI has recently pushed back the initial deadlines for re-vamping TPD, which will avoid pushing through something that doesn’t work within an arbitrary time limit – and they should be applauded for taking this stance.
Hurdles
There will undoubtedly be hurdles for the industry to overcome in bringing these improvements to the market.
First, and perhaps most tricky, is agreeing a set of model definitions or other TPD replacement that keeps every underwriter, actuary, regulator and distributor in our market happy. No doubt each will have their own view as to how the definitions should read.
Actuaries may then have difficulties in pricing the new definitions as currently available data would be based on claims from an old wording. Once again, we might see that the most competitive CI prices come from those pricing actuaries who under price the risk the most.
We also have the issue of some insurers being more generous than whatever the new agreed standard is. How will the other insurers react? Will they have to be more generous than the ABI standard for them to remain competitive? And in which case, if competition pushes insurers away from the standard practice, why have a standard practice in the first place?
One bearing on how an insurer may act could be linked to their distribution strategy. If they are selling predominantly through advice led channels, then perhaps they’ll prefer ‘better than standard’ TPD, realising that IFAs will not want their clients to have their claims turned down because they bought the wrong policy. On the other hand, if they are selling through price driven channels, then perhaps they’ll want to have the strictest possible claim criteria to keep claim costs down.
Whatever happens, it’ll be some time before new definitions are brought to market – so the industry needs to make TPD work in the mean time. To help, distributors and providers need to make it very clear to their clients what it is that their clients are buying, and highlight any alternatives which may meet their client’s needs better.
Perhaps the message to consumers needs to be: CI policies pay out a lump sum if you get the ‘right’ (strictly defined) illness. Income Protection policies protect your income from poor health. Which protects you better?
Anthony Burpitt is research and development manager at Munich Re
