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Cover confusion

The regulation of health insurances is falling between two chairs – a

situation which has been described as muddled and confused.

Long-term care cover, permanent health insurance (or income protection),

critical-illness insurance and private medical insurance are all


Later this year, the General Insurance Standards Council will assume

regulation of short-term or general insurance. Any LTC policy that has an

investment component is already regulated by the FSA.

But moves to regulate LTC threaten to cause confusion. The Treasury&#39s

consultation paper on LTC insurance sets out a range of options, including

its preferred option (option three in the paper) which would allow for full

FSA regulation of LTC only. Option four would result in the FSA regulation

of all health insurances. The consultation period closed at the end of

March and the Treasury is collating responses.

The Treasury would seem to have effectively prejudged the consultation.

Spokeswoman Liane Farrer says: “We do not intend to have statutory

regulation of critical and permanent health insurance. It is up to the

industry if it wants to regulate itself.” She does not think this will lead

to anomalies or loopholes.

Swiss Re technical manager Ron Wheatcroft says: “The challenge for the

Treasury will be to define long-term care very clearly and in such as way

as not to encapsulate other health insurances.” He points out the Insurance

Companies Act does not define LTC, which is subsumed under PHI.

At present, health insurances are covered by one of two ABI codes of

practice. Those that fall under the general code – that is short-term

business – will see regulation transfer to the GISC. Long-term insurance

contracts and permanent health insurance – other than LTC and regulated in

accordance with the Treasury&#39s future announcement – will continue to come

under the scope of the ABI life insurance (non-investment business) selling

code of practice.

The difficulty arises in the way in which products are defined and in how

they are written. It is possible for many of these products to be written

as either shortor long-term contracts, says Wheatcroft.

At present, there seems a lack of will to sort out the confusion. The GISC

does not want to assume responsibility but it has said it will step into

the breach if necessary, albeit reluctantly.

GISC head of communications Catherine Nicoll says, from a consumer

protection point of view, it is unsatisfactory that health insurances

should be unregulated. “If the FSA showed no sign of doing so, we would ask

the GISC board to extend its scope to cover these,” she says.

Most submissions to the Treasury&#39s consultation paper have followed the

Government&#39s preferred option three, leaving critical-illness cover and

permanent health insurance out in the wilderness.

Many justify this as wanting to avoid further delays to the regulation of

LTC, which further consideration of other healthcare insurance would


Norwich Union Life long-term care strategy manager Sandy Johnstone says:

“We do not support the inclusion of other healthcare products, which we

believe should be done separately. LTC should be first in the queue and we

do not want to see another period of protracted debate before regulation

takes effect.”

The Treasury consultation document states it is unaware of any consumer

detriment at present. Many in the industry are keen to point out they act

as though health insurances were regulated.

Nursing Home Fees Agency partner Philip Spiers says: “We are for

regulation and already act as if it was regulated. The danger with

long-term care insurance is that it replaces means-tested state benefits,

which private insurance could unnecessarily be replacing pound for pound.”

Looking at it from another angle, Bupa Health Assurance managing director

Geoff Brown asks: “Does confusion constitute consumer detriment?” He adds

that Bupa is alone in favouring option four – the full regulation of all

health insurance.

Regulation soup is the last thing that the consolidation of regulatory

powers to the FSA and the GISC was meant to achieve. Neither was the

effective deregulation of certain products supposed to happen.

Imagine this scenario which is put forward by Wheatcroft. An IFA sells a

pension plan with three ancillary products. The pension itself is regulated

by the FSA. The term insurance has been deregulated, long-term waiver falls

under the ABI code of practice and premium waiver falls under the

regulation of the GISC.

Not only is this confusing for all concerned, but it raises the spectre of

dual regulation for IFAs. Money Marketing first pointed out that the GISC&#39s

controversial rule 42 means providers regulated by the GISC will only be

allowed to do business with intermediaries who are also members.

This is an outcome welcomed by no one. Nicoll says: “Unfortunately, there

will have to be some dual regulation. It would be better if these products,

which are usually sold by people who are regulated by the FSA, were then

also regulated by them.”

From a provider&#39s point of view, Brown regrets the consumer confusion that

will ensue. IFAs will not relish the cost and bureaucracy of another

regulator. Wheat-croft envisages the market being skewed as IFAs shy away

from certain GISC-regulated products. Partial regulation could actually

then constrict consumer access to some products.

The Treasury consultation paper recognises the need for regulation of LTC

products. It says: “Many policies are sold at a time of stress or crisis in

consumers&#39 lives. They may, therefore, be particularly vulnerable to


Brown believes the industry is suspic-ious of a move to regulate LTC by

Cat standards initially, with full regulation following later in the year.

The Cat standards suggested have been criticised for on the one hand

constraining the development of a product in its infancy and on the other

as offering insufficient protection.

The proper selling of long-term care insurance will require new skills

from many IFAs. Johnstone points to the fact that LTC is about advice and

is not product-driven.He says: “IFAs need to understand the social

environment and how long-term care is delivered in this country. Advice to

clients falls into two parts. First, they should be made aware of what

state provision there is and personal accountability. Only then should they

move on to assess the risk element. Buying insurance is part of that

personal responsibility.”

Spiers says: “Those who need LTC will typically be 65 years old and in

denial about going into a care home. They tend also to be very suspicious

of IFAs. For LTC to work, the Government has to get behind it, like with

pensions 20 years ago.”

The question of definitions does not only bedevil the products themselves

but also the aspects that the policies are to cover. Age Concern senior

parliamentary officer Richard Heller says: “Nursing care has been defined

in a restrictive way by the Government. Older and disabled people will

still be left with substantial care bills.”

Permanent Insurance head of sales and marketing Rod MacDonald believes the

issue for IFAs is to get clients in their 50s to start thinking about LTC

rather than waiting until they need it. But he adds that the uncertainties

make it difficult to advise on LTC at present.

Consumers&#39 Association senior policy officer Mick McAteer is calling for

one-stop regulation. But this solution to the quagmire might not be a

pipedream. Reflecting the opinion of many, Macdonald says: “I can see the

GISC being swept into the FSA. There is not a strong argument to keep

general insurance out in the long run.”


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