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How severe is severe?

“The best critical illness policy you could get is one that pays out on a severity basis,” says one provider.

But considering this particular provider, like many, doesn’t currently offer severity-based CI products, it shines a light on the way the industry might be moving.

To date, Pru Protect is the only provider who offers a complete severity-based product to the marketplace, paying out based on the severity of the policy’s 154 conditions.

Director of protection Kevin Carr describes the product’s payout structure as “the future of CI cover”.

He says: “A lot of providers want to do severity-based but it’s not going to happen over night. What a lot will do is watch how Pru Protect get on and if the market is clearly moving that way then I have no doubt that there will be more severity-based contracts in the years to come.”

Carr acknowledges firms will label severity-based plans as too complicated, but draws attention to the whole concept of home and car insurance. He says: “If you break your mirror, you don’t get enough money for a new car. It’s the same thing. Would you rather have some money for a less serious condition and still be insured, then get no money at all even when you’ve got something wrong with you?”

Skandia recently moved towards a more severity-based approach, listing seven conditions where they pay £10,000 without reducing the critical illness cover. Conditions include keyhole coronary artery bypass surgery, less extensive third degree burns, loss of an eye or the use of an eye, loss of either one hand or one foot and significant visual impairment.

Bright Grey product director Roger Edwards says he likes the concept of severity-based plans but says there is a comparability issue. Severity-based polices currently appear on portals such as 1st – The Exchange in the same column as CI cover, but Edwards says the two product types are not the same.

He says: “There are pluses and minuses for each but at the moment they are being talked about as replaceable alternatives and they just aren’t. They do different jobs. What I would ideally like to see is more companies coming into the market with severity-based products and if it proves popular, it can be established as a separate product line on all the portals, comparison sites and search engines so we get clarity amongst the consumer.”

Early in Bright Grey’s existence, Edwards says the firm researched various different products, one of which was a severity-based option. However, while the consumer views on the product were very positive, advisers found it too difficult and preferred the traditional model, says Edwards.

Progress from Royal Liver IFA marketing manager Aidan Dewhurst says there are pros and cons to both conventional CI and severity-based illness cover. But he says traditional and severity-based “aren’t opposite ends of the spectrum, they are simply different routes to the same destination”.

He says: “The problem with severity-based products is that the process includes subjectivity and interpretation before claims will be paid. After all, somebody has to judge the severity before a payment is made, and the severity then determines the payout. In my experience customers want simplicity rather than uncertainty.

“So while in principle severity-based products are sound in their approach, in practice they can lead to problems and uncertainty about what is or isn’t covered.”

Similarly, Highclere Financial Services partner Alan Lakey says: “If more insurers enter this market then I suggest that the industry, maybe through the ABI, should develop a central body which would agree the claim for all severity-based claims.”

Lifesearch senior policy adviser Matt Morris says severity-based cover is a the kind of innovation the industry needs. He says: “I would certainly like to see more providers offer it as you can’t have too much of a good thing, although there will always be a place for traditional CI cover too.”

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