The increased risk of serious illness is the downside of improved life expectancy for all age groups, and critical-illness cover is a natural recommendation for clients seeking financial protection for themselves and their families. Yet until recently, CI insurance has had a bad reputation for rejecting claims.
Rejection has mainly hinged on the disclosure of existing conditions and insurers have been able to avoid paying out in cases where a consumer has not disclosed a condition that has little or no bearing on the claim.
Growing disgruntlement at this state of affairs prompted the Association of British Insurers in 2008 to introduce guidance on the fair treatment of claims under long-term protection policies.
In January 2009, this was upgraded to the status of a code of practice. The code introduced three main categories of non-disclosure – innocent (resulting in the claim being paid in full), negligent (applying a proportionate payment) and delib – erate or without any care (resulting in a rejected claim).
The new approach seems to be bearing fruit and the latest ABI figures show the number of CI claims paid out rose to 90 per cent in 2008 compared with just 80 per cent in 2005.
Top payer is Legal & General, which paid out on 93 per cent of claims in 2008, a rise of five percentage points on a year earlier. Zurich and Aegon Scottish Equitable each paid out 91 per cent compared with 88 per cent for Zurich in 2007 and 82 per cent for Aegon.
Kevin Carr, managing director at Kevin Carr Consulting and chief executive of Protection Review, says: “The ABI and the financial ombudsman have been working to improve issues over non-disclosure, including limiting insurers going through past medical records at claim stage and also
clarification of what is and is not covered in the literature.
“Years ago the big print just said ’cancer’, whereas these days it says ’cancer, excluding less-advanced conditions’, or words to that effect.
This means policyholders can see that all forms of cancer are covered.”
Ray Black, managing director of the protection website Money-minder.com, says: “The industry has improved significantly over the last few years, and definitions on what is and what is not covered on criticalillness plans are far clearer.”
The fact is that insurers’ reputations are on the line with regard to payout rates, and good rates are a seen as a marketing opportunity.
Carr says: “The very fact these statistics are now so widely published means more companies are looking for reasons to pay, rather than
not to pay.”
Informed Choice managing director Martin Bamford believes more claims are being successful because more are being partially accepted – a direct result of the new ABI code of practice. He says: “More partial claims are being paid that might have been flatly declined in the past.”
One problem with a higher acceptance rate is that it tends to push up premiums, since successful claims are less likely to be cross-subsidised by unsuccessful claimants.
Bamford says: “We have seen the cost of life cover come down over the last decade but CI cover has generally become more expensive and also more focused.”
But he adds: “It is fair to say the quality of cover has improved, as has the quality of underwriting and the entire application process.”
Carr thinks costs are actually coming down and says: “The price of CI increased significantly around six or seven years ago, prices have been
falling in recent years, and for most people – those with guaranteed rate policies – the price does not change once your policy has started. This is, of course, very different from most insurance policies where prices change every year.”
Innovation is also bringing new products to the market. Carr says: “Some providers have looked to improve their policies by adding coverage for
less serious conditions, such as early stage cancers requiring a lumpectomy or mastectomy.”
He points out that Skandia, Royal Liver, Bupa, Axa and PruProtect do this, while the Pru goes even further with its severity plan, which covers
154 conditions and pays between 10 and 100 per cent of the sum assured depending on the severity of the illness.
But the disclosure issue does still remain a problem for the industry.
The ABI admits that policyholders currently answer the questions asked by their insurance company but at the same time are expected to
disclose any other facts that may be relevant to the insurer, without necessarily knowing what factors the insurer will take into account when
accepting a risk.
Black says: “Life and criticalillness proposal forms have become longer and more in-depth for a number of years now. Although this lengthens the application process, the insurer is much less likely to reject the claim on the basis of non-disclosure.”
As Bamford points out, the greater the chance an insurer will pay out makes it easier to recommend.
He says: “Greater confidence that a critical-illness insurer will pay out for a successful claim certainly makes it an easier recommendation to make, where a client has a need for this type of insurance.”