Individual critical illness cover (CIC) is often hailed as a straightforward type of insurance, but there are pitfalls lurking in the small print. Despite work by the Association of British Insurers to produce standard terminology, model definitions and key features documents, products retain critical differences that could have a significant impact on clients at claim.
According to Skandia Life senior group marketing manager Lynda Cox, customers are largely unaware how these wordings could affect them. “When signing up to a contract, most assume any loosely-related illness will be covered,” she says. “But a heart attack is not clear cut. You may come within a whisker of an attack, be ordered to stop smoking and drinking by your doctor and to take half an aspirin daily, but be unable to claim on your policy.”
The role of the intermediary is crucial. “Clients must understand that policies don’t cover all critical illnesses, but only specific and clearly-defined conditions. Insurers don’t do this to wriggle out of claims but to make sure the client, IFA, insurer and doctor know exactly what is covered,” she says.
This leads to a steady trickle of rejected CIC claims. Cox says a lot of claimants fall short on the medical criteria. And, in many cases, the IFA puts in a claim as a long shot, with little hope of success.
Multiple sclerosis is another diagnosis that can cause problems. “A medical test may not always confirm the doctor’s suspicions, or help them with treatment, but the insurer will need one before paying a claim. Many customers don’t realise this, and assume the insurer is being obstructive,” says Cox.
Insurers also differ in which illnesses are explicitly covered. Skandia Life, for example, introduced cover for cardiomyopathy from January 2001. “This can be a serious condition, and potentially terminal, but other heart diseases such as angina are excluded, which confuses customers,” says Cox. Insurers have to strike a balance between covering serious illnesses and keeping cover affordable.
Cox says before a medical condition can be covered, it must meet several criteria. There must be an unequivocal diagnosis, a measurable incidence of cases, and the impact must be proportionate on premiums. “But, of course, customers don’t understand that,” she says.
The onus is on intermediaries to guide the customer, but they can themselves be misled by red herrings. When HIV/Aids cover was first introduced in 1991, it was a gimmick, as policies only covered infection following a blood transfusion, highly unlikely because all blood products in the UK were being screened.
“Ironically, this cover has gradually become worthwhile,” says Cox. “We now extend cover to physical or sexual assaults, or medical professionals becoming infected following needlestick injury.”
Roger Edwards, the head of products at Scottish Life’s new protection business, says it is vital the industry tackles small print concerns, which are the most common public complaint about all types of insurance. “Focus groups show that many customers believe insurers use it to wriggle out of a claim,” he says. “This perception can prove damaging, especially if we want to build confidence in CIC.”
Unfortunately, some conflict seems inevitable. Insurers typically exclude transient ischaemic attack from CIC policies, primarily because patients recover within 24 hours, but many customers believe this should be paid under heart attack, and small print erroneously gets the blame.
Edwards dislikes other types of exclusion. “I always want to remove as many exclusions as possible,” he says. “For example, failure to follow medical advice is often seen by customers simply as an excuse not to pay out. If the doctor says take a paracetamol and the patient doesn’t, is that failure? This is a grey area and causes unnecessary suspicion. We’ll never clear up all the problems, but the more effort insurers put into making policies clear and removing the niggles, the better.”
However, he fears industry efforts will be undermined by the banks. “When a bank sells CIC as a mortgage add-on, there is no intermediary explaining how the product works and what is excluded. People simply tick a box,” he says. “To make matters worse, cover from banks is not only more expensive, but covers fewer illnesses, increasing disenchantment with the product.”
Dale Tranter, a senior researcher with Misys IFA, says policy exclusions are a minefield for intermediaries, and picks a number that could blow up in your face. “Failure to follow medical advice is potentially dodgy,” he says. “If you ignore the doctor who tells you to give up drinking, and then get cirrhosis of the liver, you probably have yourself to blame. But if you seek advice for headaches at work, but continue working too hard, and suffer from a tumour that is inoperable, that is a different matter.”
According to Tranter, most insurers view claims leniently and are wary of bad publicity, and intermediaries know which firms play fair. But he says: “If money gets tighter, competition increases and companies watch their budgets closely, they might start to take a harder line on claims. Advisers should question whether policies could allow the insurer to weasel out of paying a claim ten years later.”
Small-print troubles can emerge in unexpected ways. “Some companies insist the customer informs them when changing job type,” says Tranter. “If they don’t, and make a claim for permanent and total disability possibly related to this new job, their claim may be rejected.” Some policies offer a 14-day survival period following illness, while others set the limit at 28 days. “There is a significant mortality difference between 14 and 28 days. We only recommend policies that apply 14 days,” he says.
Some policies set limits on how much extra cover they will grant without underwriting, following life events such as getting married or having a child. “Some may only let you increase your sum assured by £25,000 without underwriting. Others will be more generous. A younger client likely to take on these responsibilities should be aware of this,” says Tranter.
Sifting through the smallest of print is essential. “Customers must inform the insurer if they regularly pursue dangerous activities,” he says. “But some insurers won’t pay holiday claims, say, if a customer goes paragliding on the spur of the moment. They may also refuse those injuring themselves abseiling down their office for charity. Some won’t pay if the client is living abroad.”
A number of insurers, including Swiss Life, Scottish Provident and Skandia Life, offer buyback of CIC cover, but intermediaries must check what illnesses can be covered. Some insurers only offer heart attack, cancer and stroke, while others cover up to 12 different illnesses.
Neil Thomas, the director of IFAs Simpsons of Brighton, says explaining CIC exclusions is one of the most prickly issues facing intermediaries when sitting in front of a client. “Many clients think the diagnosis of a serious illness is simple, and can’t press the complexity,” he says. “They roll their eyes in horror when you run through the list of potential illnesses, but it is important.”
Nevertheless, he prefers insurance companies to clearly set out all illnesses covered. “I had one client recently who was concerned about rheumatoid arthritis. Some companies specifically say this is covered, whereas with others you would have to rely on total and permanent disability,” he says.
Definitions of total and permanent disability remain subjective. “Much depends on how the policy wording is construed, especially with back problems. Companies typically apply a range of life and work tasks, but view these differently. CIC is very much premium driven, but intermediaries must never neglect the small print,” says Thomas.
Scottish Equitable Protect head of marketing Heather Armstrong argues that many insurers steal an unwarranted competitive edge by cramming their literature with medical conditions. “Many insurers are now boasting about covering CJD, but we cover that under other neurological conditions, without explicitly setting it out. This attitude can mislead intermediaries,” she says.
She points out that more than nine out of ten CIC claims are still for the major illnesses such as heart attack, cancer and stroke. “Although 35 conditions may look better than 20, advisers must check carefully what is really covered. Some insurers have recently added some very obscure illnesses,” she says.
If insurers honestly believe certain vital conditions are excluded, they should address these on a co-ordinated basis, rather than ramming them into their policies to impress the unwary. “An ongoing problem is that many providers still bury bad news in the small print at the back of their literature,” she says. “We put everything up front in the policy conditions where intermediaries and clients can see them clearly.”
Rosalind Pearson, the research and planning manager (personal finance) for Swiss Life, says illness definitions cause most small print problems.
But the recent move towards core illnesses and model definitions has been an “enormous help” for intermediaries, providers and consumers. “The downside is that as medical science moves forward there is a competitive disadvantage in moving away from the norm,” she says.
Pearson agrees with Armstrong that small print is an industry-wide issue and should be addressed as such. She believes one option is flexible policy definitions, so that new conditions can be accommodated and old ones made relevant to current medical practice.
But no system is perfect. “There will always be an element of subjectivity in the claims process, particularly for permanent and total disability, which means insurers will always view cases in different ways,” she says.
Pearson warns the number of CIC claims will escalate as portfolios mature, sparking more contentious claims and bad publicity for the product. “Many recognise that CIC has inherent flaws, particularly as there is no weighting on payouts according to severity of condition, and the all-or-nothing nature of the payment. The problems lie not only in the small print, but in the big print as well,” she says.