Back to protection basics

26 November 2009

In recent years, we have witnessed a disaster zone where banks and other non-consumer-friendly institutions have foisted payment protection insurance plans on the unsuspecting.

Unlike the regulator, advisers have known for years these plans, which still continue to be marketed as income protection policies, were overpriced and largely superfluous.

When reviewing this, we can see many plans would never have paid out due to the inability to work definition that was used. The typical wording was a variation of “unable to follow any occupation”, which meant many claims were rejected using the rationale that some other occupation could be followed.

There is a tangential connection with the income protection plans currently being marketed by many providers. I refer to the inability of many insurers to devise a consumer-friendly product which also appeals to the adviser who has to market these plans.

I see many design faults but I am focusing on just two. The first relates to the continuing use of claim definitions which fail to meet reasonable expectations. The first of these is the “any occupation” wording which continues to torment fairness and is still used by Unum for applicants in higher-risk occupations. The definition cannot reasonably be met unless the claimant is immobile or hospitalised and there really seems little point in marketing a plan which offers such low potential for a successful claim.

The second, and more prevalent claim definition, is based on the inability to perform a set of activities. Whether titled “functional activity tests” or “activities of daily living/ working” the criteria is similar, to claim the policyholder must be unable to perform two or three from a list of between five and 11 activities.

The problem with this method is that debilitating conditions can slip through, thwarting the plan’s underlying purpose. One example involves Legal & General, a company which, admittedly, does not attempt to market its IP plan to advisers. The claimant must be unable to perform three of six functional ability tests but the wording denies a claimant who has broken both arms. In this instance, he or she would only be able to satisfy two conditions even though there is no reasonable opportunity to continue working.

Another potential area of detriment is blindness. Surely, such a condition would activate a successful claim with all of the providers? No. Blindness would not satisfy two of the six activities required by Scottish Provident nor arguably the wordings favoured by Royal Liver and Legal & General.

The second area of poor product design relates to the definition “unable to follow your own occupation or any suited by training, education or experience”. The problem here is that while a plumber who has broken his arm may, due to past experience, be able to work in an office, no employer can reasonably be expected to take him on while he is signed off. Even if such a charitable employer could be located, would they be willing to employ somebody who is only likely to remain with them while his arm heals?

Such a definition fails the consumer because his reasonable expectations are not being met. It fails advisers as their clients are being short-changed and their own expectation of fair and reasonable behaviour is being denied.

There needs to be a complete reassessment of income protection basics because, despite progress by PruProtect, Pioneer, Holloway and LV=, there is a significant vacuum waiting to be filled by forward-thinking providers.

Alan Lakey is partner at Highclere Financial Services and director of Adviser Alliance

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