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Lakey: Insurers must stop using activity-based definitions

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


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There are 9 comments at the moment, we would love to hear your opinion too.

  1. Don’t sell the plans if they’re no good!!!
    Insurers will soon get the message, they’re beholden to their shareholders and as long as there’s a demand they’ll provide the product!
    Are IFAs really that stupid?

  2. One of the reasons we at British Friendly only offer own occupation is because our policyholders become members and therefore are ultimately our owners who we work for.

    Unlike other insurers, as a mutual we don’t have other competing stakeholders to satisfy (shareholders/fund managers).

    If we pay a claim we have a happy member not an unhappy shareholder.

    It makes life simple – if you are a plumber and can’t work as plumber we want to pay you not debate whether or not you can climb the stairs!

  3. Good article Alan and well presented. Lets hope the industry starts to take note.




  5. If you cant explain how the definition works so that the client understands the scope of the cover that they are buying then you shouldn’t be selling it.

    ADL definitions were originally designed for LTC policies. Work Tasks are derivations of the original state tests for Incapacity Benefit (or what ever it was called at the time). The latter somehow originally crept out of an ABI Working Group and into one insurers product, and bingo others jumped on the band wagon!

    Both were brought into TPD and IP to avoid the issues associated with “Any Occ” definitions. Neither underwent any rigorous testing to determine their impact on claims admissions. All that was considered was would it provide a more objective definition against which incapacity could be measured, particularly in relation to mental illness and musculo skeletal claims.

    Basically what has happened is that we have just moved the problem. Insurers no longer had to use a definition that they perceived as unfit for purpose and that issue was passed to the client…

    To claim for failure of 2-3 ADLs, the average younger or middle age person has to be not far off terminally ill or very badly injured.

    Work Tasks are slightly less onerous but to fail 2-3 still requires are far greater degree of incapacity than was needed to meet an Any Occ claim.

    IP, TPD and WoP products with these definitions should be accompanied by major health warnings regarding the limited scope of the cover…

  6. So unless own occupation is not an option we should not advise on the policy? Surely each case on its own merits and ADL is better than no cover at all- but it should be advised correctly (and very clearly revisited at suitability stage perhaps even as a risk warning) and priced as such and not the same as Own Occupation due to the very nature of ‘hoop jumping’ that will be required for ADL.

  7. Spot on Bobby. Personally, if Own/Suited and Any definitions are available I would take these in preference to Work Task and ADLs.

  8. No doubt there are high risk occupations, such as crane driver, where only ADLs will be offered. In these few circumstances it is better than nothing.

    The main thrust has to be that policyholder expectations must be met and the hurdle jumping that ADLs require must be fully explained.

    The overwhelming majority of consumers will find insurers able to offer own occupation to them and in these circumstances there is no excuse to go down the ADL route.

  9. As an income protection specialist it comes down to cost vs benefit. Own occ is perfect but expensive and for good reason. We now pay conditions that are completely subjective and medicalised by doctors who don’t need the conflict with their patient ( quite reasonably). Many claims are spurious and end up being paid for over a decade or more for little objective evidence. So the effect of this is that genuine claims get caught up in the mix. It is not easy to distinguish and it is not about Insurers being reluctant to pay just that they get hammered by the lack of support medically and the lack of objectivity. I am afraid that the product needs an overhaul limiting subjective condition payments…it is not incidence that causes the problem but rather the durations that are well in excess of the norm!

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