Two weeks ago, a policyholder won his two-year-plus battle with Scottish Provident over an income protection claim, with the Financial Ombudsman Service ruling that his medical condition met the specific claim requirements of the plan.
The average punter might wonder how and why such an argument could ensue. Surely if you cannot work, then the policy pays up, right?
Sadly, the answer is no because this claim wording specified that the policyholder had to fail two of six named activities.
Like me, many specialist protection advisers will be shaking their heads and lamenting the continuing use of activity-based definitions by insurers.
The industry continually bemoans the lack of interest in income protection when, theoretically, it is the most credible method of protection available. After all, without an ongoing income, pretty much everything else falls apart. Maybe this design flaw is one of the reasons for the low uptake of new plans. Maybe consumers and advisers instinctively recognise that unless an own-occupation definition is used, the claim is subject to the judgements of people who work for the very company that has to pay the claim. Some might argue that this is as partial as expecting an ombudsman to give a fair and balanced overview when pronouncing on an adjudicator’s decision.
Own-occupation cover is self-explanatory and is obviously the definition of choice for all but the most deluded. How perverse then that as an industry we persist with marketing plans with lesser definitions. Insurers argue that higher-risk occupations must be assessed differently but this view is irretrievably weakened by the numbers of friendly societies that are able to offer own-occupation plans to all bar the highest risks.
What is so inherently unfair about activity-based definitions? Simply that somebody who is physically incapable of working can be denied payment due to an inability to satisfy a dubious claim criteria.
Reinsurers confirm that activity-based wordings are responsible for the bulk of the 55 per cent of total permanent disability declinatures, so it is no great leap to suggest they are similarly responsible for most rejected IP claims.
Scrutinising the claim requirements shows how daunting the process can be. Scottish Provident requires the claimant to fail two of the following – walking 200 metres, lifting a 1kg object and walking five metres, using a pen, pencil or keyboard, understanding speech in a quiet room even with a hearing aid, speaking understandably in a quiet room and reading 16-point print with spectacles. By way of contrast, LV= requires the failure of three of eight similar activities.
I fully accept that insurers are free to offer whatever plan designs they deem appropriate but it is equally true that clued-up advisers will avoid such definitions to provide certainty to their clients and meet their reasonable expectations.
The Exeter, British Friendly, Cirencester and Shepherds Friendly Society have all managed it so it is time for the others to shape up.
Now I did plan on avoiding mention the RDR and the FSA but such things are nigh on impossible when confronted with foolishness and a lack of acumen. At a recent meeting with other IFAs, the matter of trail commission was raised together with the impact and consequences of its loss due to any plan alterations. This was considered to be a churners’ charter as it encourages potentially bad behaviour in order that existing income is protected. Are we again looking at unintended consequences? Are the architects of this stuff really that stupid?
Alan Lakey is partner at Highclere Financial Services