Timing is critical

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With the date for providers to apply the new Statement of Best Practice for critical illness cover passed, Nick Kirwan investigates why now is the time to win back consumer trust

Now that the deadline has passed for insurers to implement the new Statement of Best Practice for critical illness (CI) cover, it is a good time to reflect on whether it is achieving what it set out to do.

When the Association of British Insurers (ABI) CI Working Party started the last three-year review of the Statement of Best Practice for CI cover, the ABI kicked off the project by setting out the challenges faced by the market at that time. These were in three main areas: sustainability, reputation and regulation. Looking back to the end of 2004, there were serious questions about whether CI as a product was sustainable in the light of medical advances.

Sustainability

Swiss Re had pulled out of the CI market, leaving a shortage of reinsurance capacity forcing some insurers out of offering CI with guaranteed premiums. Those remaining in the guaranteed premium CI market only did so by offering premiums at much higher rates than before.

Higher premiums made CI less affordable with a consequent reduction in sales that subsequently killed the rebroking market. It will probably never be known what proportion of the drop in reported new sales was down to the end of rebroking and how much was due to the more serious reduction in new customers.

These issues together threatened the very survival of CI and there were real questions about how long CI would continue to be available.

Reputation

The question of consumer trust and the reputation of the industry was then, as now, probably the biggest single issue the industry faced. Despite the fact the industry has been paying out an estimated £750m a year in CI claims to people in desperate need of financial help - a fact that everyone in the industry should all be very proud of - the focus of the media and regulators remains firmly on the claims that are turned down.

To be transparent, the industry started to publish statistics for declined claims. However, the numbers are often bandied about in the wrong context - sometimes by people who, for example, do not grasp why comparisons are inappropriate. However, the key to winning back consumer trust is to reduce the proportion of declined claims so that over time one can see the number of claims that are turned down falling.

Regulation

The published claims statistics did not go unnoticed by the regulator. The Financial Services Authority (FSA) commented that declined CI claims looked "high" and also that its Treating Customers Fairly (TCF) initiative brings considerable challenges for more complex products like income protection (IP) and CI.

As if this was not enough, the FSA's FinProms update in December 2005 slammed the industry for "scaremongering" and inappropriate use of policy exclusions. The FSA noted that more work on CI was on the way.

Clearly, taking the issues of sustainability, reputation and regulation together, the CI Working Party had its work cut out. But where to start?

To address the issues around sustainability, the ABI wanted to come up with CI definitions that would be more enduring over time in the light of potential future medical advances. A key aim of this was to allow insurers and reinsurers to have more confidence in their pricing assumptions as the incidence should be less exposed to "shocks" from future medical breakthroughs.

Other benefits would be that the standard definitions should need fewer changes in the future and therefore fewer "generations" of illness definitions. In turn, this would make it easier for everyone to understand what is covered and what is not, so that there should be fewer instances when people are surprised about the scope of their cover.

To undertake this work, for each illness definition, the ABI drew up a detailed matrix of categories of possible areas of medical advance (for example, improved diagnostics, genetics and NHS capacity) and considered how each may affect the cover in the future. By applying a traffic-light colour code to each area the ABI developed a "heat map" of issues to address. By tackling each "red issue" first, and then the amber ones, the new set of 23 illness definitions began to emerge.

For cancer, medical science will continue to do two things - diagnose it earlier and treat it more effectively. This means that cases will increasingly be diagnosed at the point where cases first start to become covered. Accordingly, a key objective was to have a clearer, sharper line between what is covered and what is not.

Similarly, the ABI incorporated the British Society of Cardiology's recommended levels for troponins to be more specific about the levels the medical profession says are consistent with the diagnosis of a heart attack.

For degenerative conditions such as Parkinson's and Alzheimer's diseases, it wanted to make it clear that these become covered from the point where the condition starts to have an impact on someone's life. The impact starts with the onset of symptoms, which is the point at which these conditions are covered. As it is almost always the onset of symptoms that would cause someone to go to their doctor to be diagnosed, the cover is, effectively, the same as now.

To address the regulatory and reputational issues, the ABI recognised that the key was to address the issue of declined claims. As industry professionals know, declined claims can happen for two reasons - non-disclosure or confusion about the cover.

The work to improve disclosure was tackled by improving the clarity of application forms. A key ingredient to this work was feedback from the Financial Ombudsman Services about the kinds of questions that trip consumers up. The industry needs to work together to ensure that every applicant has every opportunity to offer all the relevant information by simply answering the questions carefully, and to the best of their knowledge and belief. If applicants do this, it is vital that they can rely on their policy to pay out.

The other key area was improving clarity about what is covered so people understand what CI is and what they can, and cannot, claim for. Based on consumer research, the new Statement of Best Practice addresses this at two levels.

First, at the product level. The new Statement of Best Practice requires all insurers to use a standard clear description of what CI cover is - the ABI tested this with consumers for key points of understanding. And, as all insurers will use it, people will see it over and over again to really get the message across.

And second, at the individual illness definition level. If the customer simply sees that "cancer" is covered, one can hardly be surprised if they assume that all cancers are covered, leading to consumers feeling let down if a less advanced cancer claim is turned down.

This is why the new illness definitions have much more descriptive headings to give consumers a much better first impression and a clear understanding of what is covered, without referring to the medical terminology in the policy definition.

Of all the illnesses, cancer was the most important, as it accounts for more than half of all CI claims and around 85% of all CI claims for women. Because of this, the ABI asked Macmillan Cancer Support and Cancer Backup to help it prepare a shortlist of four possible cancer headings for the consumer focus groups. The version consumers found clearest was "Cancer - excluding less advances cases", which the ABI adopted as the new heading.

The ABI was keen to test the FSA's comments about scaremongering. To do so, it gathered lots of information about illnesses from the Government, charities, advisers and insurers and showed it to consumer focus groups to see what they made of it all.

The ABI found that consumers think "scary" is different to "scaremongering". In particular, they found that claims paid statistics from insurers were scary but very helpful in understanding the scope of the cover and the need for it - definitely not scaremongering. Indeed, consumers said none of the information the ABI showed them from any source was scaremongering - the ABI gave this feedback to the FSA.

Looking back to the start of the review, CI has clearly come a long way. So have the changes been successful?

On the sustainability question, the answer has to be a resounding "yes". There is now more reinsurance capacity in the market, those looking to offer guaranteed rates can do so and the questions about whether CI has a future seem to have completely gone away. Indeed, premiums for CI have even started to fall again, the sign of a healthy competitive market working for consumers.

Of the other changes, the jury is still out. It will take time for the clarity measures to take effect but at least the ABI has been working to make things better. However, if the consumer research findings are right, the changes to improve clarity of application forms and the scope of cover should make a real difference in tackling the thorny issue of declined claims. Over time, this should mean far more consumers get a payout when they expect to. There is a lot more work to do, but, hopefully, the new Statement of Best Practice is the first step on the long road to winning back consumer trust.

Nick Kirwan is chairman of the ABI Protection Committee

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