Recent stories have played on the fact that despite the Care Act (which, among other things, will introduce a £72,000 care cap) no insurance company is looking to develop care products. Specifically care products that will work in conjunction with the cap to cover the so-called catastrophe costs.
This phrase and the idea behind the need for the development of financial products came from Andrew Dilnot, who drafted the consultation document looking at how we fund care and support, which ultimately led to the Care Act itself.
Indeed, it was one of the fundamental principles of his report, along with the need to ensure people receive financial advice/guidance. The importance of individuals receiving advice exists and is contained within the Department of Health Statutory guidance to local authorities on how it must provide care and support under the Act.
The development of financial products, however, has been largely left to the market, on the not unreasonable assumption that, given the nature of the industry, if it saw an opportunity it would look to take it. What has not been covered is that the Association of British Insurers and a select group of life companies did sign a memorandum of understanding setting out their intention to at least look at this “opportunity” and have failed to do so.
In their defence, based upon their apparent lack of action, the life companies stated, with some justification, that individuals have other more pressing priorities than care insurance. Let us also not forget the pre-funded care protection market collapsed in the late 1980s and both these factors will have an influence on potential product providers. However, the idea you can design financial products around the care cap is fundamentally flawed. There are a whole host of factors that make up the calculation of how much an individual will actually pay and therefore how long, if ever, it will be before the £72,000 figure is reached. These include:
– Contributions made before April 2016 (when part two of the Act comes into force) will not count
– So called “hotel costs” estimated to be £12,000 per annum will not count
– Top up costs (the difference between what the local authority is prepared to pay and the actual cost of care the individual selects or feels they need) will also not count
Furthermore, these “hotel” and top up costs will still need to be met even after the cap has been reached. Finally, the individual will need to have his or her needs assessed as significant and as a result may need their condition to deteriorate before they can even start accumulating contributions towards the cap.
It is hardly surprising, therefore, that in a paper issued last year by the Institute of Actuaries it was estimated only 8 per cent of women and 15 per cent of men would ever reach the cap. It is then equally unsurprising that life companies are not clamouring to produce products. Providers need certainty of both the point and quantum of claim. Potential clients and advisers need the same in order to assess value. As neither the point at which a claim will be made, nor the value of the claim can accurately be calculated, it is difficult to see how products can work in conjunction with the care cap.
That is not to say, however, as some have declared, products are not being developed. They are. Just not as envisaged by Dilnot. The opportunities exist, there is a real need among consumers increasingly aware of the issues and we have a Government keen to promote and contribute toward public education. By developing products that offer dual benefits, one of which is care, but both of which are valuable in their own right, plus able to cross subsidise cost, value can be introduced and demonstrated.
A life assurance policy with the sum assured pre-paid in the event of having a care need is one example and such a policy was launched in November 2014. Two further life companies have announced their intention to launch similar versions in Q2 and Q4 of this year. There are also annuity providers working on products that will enable pension funds to purchase retirement incomes that will enhance in the event of a care need and other variants.
In other words, product providers are working on the development of care products and will continue to do so. The Care Act has been an important catalyst albeit the products themselves and how and why they will be purchased is not what was either planned or anticipated by ministers or their advisers.
Tony Mudd is divisional director of tax and technical support at St James’s Place