Answer the following. Are you more likely to die in any one year from influenza or a road accident? Answer. Your chances of dying from flu are much greater, one in 5,000 compared to one in 8,000 from dying on the road.
Tobacco is dangerous, but would you put it top of the list? Smoking 10 cigarettes a day carries a one in 200 chance of causing death in any one year. The risk of dying from an accident at home is one in 26,000. Home is more dangerous than your workplace. The risk of dying through an accident at work is only one in 43,500.
These are examples the British Medical Association gave a few years ago in a paper on risk, concluding that people’s perception of risk was hopelessly unrealistic.
More recently BUPA showed the same thing from another angle. It test marketed three types of critical illness insurance (CI). Under a bronze scheme, policy holders would receive cash if they suffered one of the illnesses the Office of Fair Trading says should make up a “core” product sold by insurers. A silver scheme covered these medical conditions and more. A gold scheme took in a huge range of ailments.
BUPA found that people happily chose the expensive gold plan – by far the worst value for money. But who could be blamed for seeking cover against CJD when the newspapers were full of mad cow disease? The fact that only two dozen cases have been diagnosed throughout Britain is either unknown or disregarded.
The same message is put across by the OFT. In its latest report (May 1998) the watchdog castigates insurance companies for “dismal” progress towards a core product.
The OFT says: “In the absence of a clear idea about what different policies cover and of agreed definitions, consumers are unable to compare one product against another. As a result, they may pay more than is necessary and inevitably purchase, on occasion, inappropriate policies.
“Furthermore, the absence of the information needed to explain products and enable comparisons to be made can lead to exclusion, the situation where consumers fail to buy particular goods or services even when it would be in their interests to do so.”
In other words, the industry as well as the public would benefit from a template product.
Banks and insurance companies have made but slight progress to this end. IFAs, through their association, have agreed the main elements. But disagreements among independent advisers continue on the definition of total permanent disability.
Lynda Cox, life marketing manager at Skandia Life, sits on working parties at both the ABI and IFA Association. She says insurers have some difficulty seeing the need for a core product: “There is still a degree of confusion about whether a benchmark product will be of any benefit to the consumer. Some companies can’t see the need for a benchmark. They argue for a core product plus variable add-ons. They want to offer benchmark plus XYZ, not just benchmark.
“Otherwise you have got 60 companies trying to offer the same product.”
Complying with the watchdog would entail insurers in extra work. Actuaries, pricing and promotion departments would all be involved.
At present, insurance companies typically offer the basic cover plus up to 30 other diseases. Banks offer around half that total on top of the basics. Cox argues that 80% of the cost of wide-cover schemes goes on basic cover.
“There’s a fair understanding about what the OFT is driving at and more understanding of what insurers want,” she says. “Having got this far, the aim is to reach a compromise which both sides will be happy with – and which can offer something to the consumer, surely the point of the exercise.”
Persuading 60 companies, with 150 products to agree was never going to be easy, argues BUPA’s general manager, marketing, John Castagno: “To get the industry to agree is difficult but I would claim there has been more progress in CI than other branches of health insurance.”
Critical illness cover is the strongest runner in the health insurance field. Over the past five years, annual growth has averaged 30%. A quarter of a million new policies were taken out in 1994. In 1995 that figure climbed to 300,000. In 1996 there were 500,000 new subscribers, with 1.7 million policies in force. Last year, 120,000 more enlisted, bringing 1.9 million policies into force. Current predictions are for three million people covered for CI by the end of 2000.
Insurers would love to see such a phenomenon in private medical insurance (stagnant since the early `90s), long-term care insurance (still in its infancy) and income protection (sluggish but on the up). According to Legal & General’s Peter Timberlake, CI could become a much bigger product than income protection, with which there is some overlap.
Not only would a benchmark product boost sales but – as CI matures and actuarial data increases – pricing should become more competitive, says Timberlake. This could lift sales further.
But Clare Goodfellow, marketing manager with Zurich Life, attributes the popularity of critical illness to an immediate appeal. “People like the idea of receiving a lump sum. It is always going to be easier to sell than an income replacement product where the monthly sum is measured in smaller amounts even if the final sum at the end of sickness is greater.”
She thinks people should consider the benefits of income replacement before going for CI.”If you’ve got a choice between the two I think you should go for income protection. It could give you more money at the end of the day and covers a lot more diseases. You could be covered for stress and back pain, which are the two biggest causes of absenteeism.”
So what of IFAs? The sticking point within their association is the definition of total permanent disability. There are four types of TPD. One is based on the policyholder’s inability to carry out his/her own specific occupation. The second is based on the inability to carry out any occupation to which they are suited. A third arises if the policyholder is unable to carry out any occupation. The fourth variety is designed for those not in permanent employment and pays out if the policyholder is medically unable to lead an independent existence.
The association’s working party agrees on the four categories. Dissent revolves around detail. For instance, what exactly would be a suitable occupation for a surgeon who developed loss of sensation in his index finger? Could he be expected to manage the operating theatre or take a desk job in public health? The 20 committee members are also exercised on the length of time the policyholder might suffer TPD. Some say a policy should come into effect when the policyholder is unable to pursue his occupation within the foreseeable future. Others believe that the lump sum is payable when the policyholder becomes never able to work again. Yet another view is that the wording should be never until retirement.
Also unresolved is cover for organ transplant. What happens when a policyholder undergoes a liver transplant following a drug overdose? Agreement on what is self-inflicted injury in this context remains elusive.
But is progress on the IFA front sufficient when a survey shows that two in three CI buyers rely solely on sales information from insurers? Stephen Burgess, business development manager of Sun Life, is unequivocal: “Standardisation of definitions and diseases is absolutely essential for the industry and the consumer. If the industry cannot get its act together confusion will continue to reign. The ABI is doing a certain amount but we are dragging our heels and need to get it sorted.”
From the reinsurer’s view, Tony Worthington of Swiss Re Life & Health, attributes snail-like progress within the ABI to the industry’s competitive ethos. Marketing managers are stoking the problem because they want to compete on product, not price. He believes CI and income protection should be designed as a complementary package, or accelerated policy.
He says: “Accelerated policies may be one way forward but things are changing so fast because of Government welfare reform putting the emphasis on the individual to provide for himself because the state can’t and won’t.”
In such a situation, Government will seek to regulate more. That almost certainly means that insurers who don’t fall into line will have their ankles bitten by a watchdog with sharp new teeth.