Risk Clinic: Lump sum vs severity-based CI

My client has been reading about severity based payments for critical illness (CI) policies. I believe there is merit in polices that don’t do this. In sales terms, what is the opposite side of the argument I can put to him?

Alan Lakey, Highclere Financial Services

Only PruProtect offers a severity-based plan, although many providers are dipping their toes in the water by identifying areas where they can add value using partial payments.

The major problem with the severity-based approach is that it frequently involves the use of activities of daily living (ADLs) to determine the level of disability.
This in itself provides fodder for a two-day conference, but let’s consider the drawbacks as a client might view them. If the client suffers a stroke his standard CI plan pays 100% of the sum assured. His severity-based plan pays 25% because, whilst he has suffered a stroke, the physical and mental effects do not stop him from performing the ADLs.

Is he happy with company A and unhappy with company B? Whilst protection specialists are able to rationalise the plan variations, the client and his family may not be so sanguine. Indeed, partial payouts where other providers would have paid 100% may trigger complaints and all the grief that this engenders.

Severity-based exponents will, in mitigation, point to the 110 conditions that mainstream providers do not cover. This, therefore, is the trade-off. Those like me who remain suspicious of ADLs will be reluctant to promote severity-based contracts to all clients whereas those convinced by the wider coverage tend to argue vehemently in favour.

The increasing appetite of the mainstream providers to add value with partial payments for angioplasty, early-stage prostate cancer, ductal carcinoma in situ of the breast, and so on provides a kind of middle ground for those who see merit in both versions.

Robert Morrison, chief underwriter for Aviva

While there may be some appeal in linking the size of payout to the seriousness of the condition, this is often outweighed by the complexity of the products and the lack of any real cost benefit.

With CI cover there is a straightforward link between diagnosis and payment under the one-size payment approach. This makes the policy much simpler to understand and explain, both at the point of purchase and the point of claim.

With severity-based products, there’s also more potential for conflict with stepped payments. The differentiators used to determine the level of severity (and thus amount payable) often rely on fairly marginal differences.