Has the income protection (IP) industry reached tipping point? The validity of list-based occupational definitions for IP, such as work tasks and activities of daily living, has been questioned for many years. But the demand for change is becoming stronger.
First, there were calls from intermediaries. Then there was the Protection Review industry survey. Now, the Ombudsman has overturned a decision to decline a high-profile claim where the definition is based on work tasks, as recently reported in The Times.
Under the terms and conditions of the policy, the claimant was required to carry out two or more from a list of six tasks. The claim was declined and eventually ended up with the Ombudsman.
The policy did not pay out because according to its terms, the policyholder was "fi t to work". But last month, the Ombudsman found in the claimant's favour and ordered the insurer to pay the claim.
Chris Hargreaves, the policyholder said he wished he had known more about own occupation policies at the time. He said: "Yes, I would have preferred an own occupation policy. I pay about £800 a year for private medical insurance and so I would have been happy to pay more for IP.
"What's the point of paying £13 per month for a policy with a defi nition that is highly unlikely to pay out?"
The case has highlighted an issue many within the industry know already exists, which is that such policies are arguably unfit for purpose.
We have seen the removal of ‘any' occupation, which was challenged in court to mean the inability to carry out any one occupation as opposed to one of thousands, and we could see a similar pattern of development with other defi nitions.
Last year's Protection Review survey, which included views from a range of insurers, reinsurers and intermediaries, asked whether or not the industry should seek to address the on-going problems with ADL & ADW based definitions for IP policies? The results were staggering, with more than 80% of respondents calling for change.
While the majority of policies are based upon the better ‘own' or ‘suited' occupation defi nitions, where claims are typically paid without fuss, some people, generally those with more manual or stressful jobs may have a different definition, such as work or living tasks, which can be harder to claim on.
Advisers should seek out the better definitions wherever possible, and those who already have a policy should check their details.
IFA Roy McLoughlin of Master Adviser, who also sits on the Income Protection Task Force, agrees: "IP sits at the head seat of the protection insurance table because it is the claim that statistically is most likely to happen compared to critical illness cover and life insurance.
"It is therefore important that all genuine claims are paid quickly so that consumers have complete trust when taking out such an important policy. But sometimes, the most suitable policies are not available on a direct basis, which is where advisers can add real value."
There will be challenges for the industry: Can we price own occupation for everyone? Is some cover better than none? What can we do about house-persons cover? Could we build a range of typical ‘model' occupations instead of using lists?
Own occupation for everyone would price some people out of the market. But as somebody once said: "I'd rather pay more for something I need than less for something I don't, and if the policy isn't going to do the job, it frankly doesn't matter how cheap it is."
What the industry needs to do now is find a fairer and more robust measurement that doesn't impact too much on the price - this may not be easy. But the Ombudsman ruling could be the tipping point for many insurers to change.
Short-term and long-term income protection
Among other initiatives
Adam Higgs assesses the IP options available to renters
As SSP value falls