With one in two total permanent disability (TPD) claims currently being declined, Johanna Gornitzki asks whether this element of critical illness is doing more harm than good
Never have so many customers and industry experts created so much fuss over such a small number of declined claims.
Because while anecdotally it is known that a staggering 50% of total permanent disability (TPD) claims are declined, the total number of TPD claims only account for around 5% of all critical illness (CI) claims.
In light of this, it seems almost absurd that this element of CI has managed to cause such a heated debate.
One possible explanation behind the dispute is the fact that for consumers there is no difference between having a general CI or a TPD claim turned down.
Every TPD claim that is rejected is therefore effectively also destroying the reputation of CI as a whole.
For an industry desperately trying to increase consumer confidence in the product, finding a solution to the difficulties facing TPD claims is therefore key.
The original idea behind TPD was to add a category to CI that would pick up a number of unnamed illnesses that were not mentioned in the original list but would still count as critical.
However, while many people think of TPD as a sweep up benefit due to the fact that it does not exclusively cover one particular illness, there are two crucial stipulations that should not be overlooked.
One is that the illness has to totally incapacitate the policyholder.
And the second is that it has to do so for the rest of the policyholder's life.
Both criteria tend to be forgotten, with many people claiming for conditions that do not fit one or either of those descriptions, like a broken arm or a leg, making declined claim rates soar even higher.
Nick Kirwan, chairman of the Association of British Insurers' (ABI) CI working party, argues that TPD should not be seen as a sweep up benefit.
"Total permanent disability is sometimes viewed as a mop up cover for illnesses that don't meet the other definitions - which of course isn't the case. Total permanent disability only covers disabling conditions that are expected to last throughout life and which meet the definition of disability." Complexity While there are no set guidelines for what is "total" and what is "permanent", total aims to convey a sense that the disability needs to be complete or absolute, while permanent is defined in the Statement of Best Practice for CI cover as "expected to last throughout the insured person's life, irrespective of when the cover ends or the insured person retires." While this sounds reasonably straightforward, in reality, these two definitions face a number of problems.
Looking at 'total', in practice the disability needs to fulfil the definition used by a specific insurer.
This could be one of many, ranging from own occupation and activities of daily work (ADWs) to functionality ability tests (FATs).
Sadly, the fact that different life offices use different ways of assessing 'total' has not only added to the complexity surrounding the element, but it has also left the industry without a consensus of what TPD really stands for.
"Because of the tier system, different providers have got different definitions of total permanent disability. It is therefore important that advisers and policyholders carefully read the different policy documents provided by insurers," says Mick James, marketing manager at Standard Life.
While trying to keep it as simple as possible, James adds that employing just one way to define TPD would not be fair to policyholders.
"A concert pianist, for example, would not be able to perform his own occupation if he had the tip of one of his fingers cut off. However, it would not be fair to give him a payout under the own occupation definition, since an office worker, who would pay exactly the same for their policy, would not be eligible for a payout in the event that this happened to them," he says.
Another dilemma when defining whether a condition is total is that many of the claims made under TPD are for rather subjective illnesses.
Insurers have therefore come to rely heavily on judgement instead of fact, as some diseases, such as mental health problems, can be hard to test.
Understanding Kirwan admits that this is one of the problems with the element.
"Unlike the specified illness definitions, there is quite a lot of subjectivity in the definition of total permanent disability. Unfortunately, quite a high proportion of cases fall into the grey areas."
Once an insurer has come to the conclusion that a policyholder suffers from a disability, it has to decide whether it is permanent or not.
While the definition of permanent is clear, it is nigh on impossible to predict whether a person will remain totally disabled for the rest of their lives.
It is therefore a matter of determining the likelihood that the disability will last for the duration.
However, this can be a lengthy process, says Peter Hamilton, head of protection marketing at Friends Provident.
"There is no specified assessment period but, realistically, the medical assessments, tests and investigations to confirm total and permanent and irreversible disability can take some time.
This includes the scheduling of appointments in the NHS and time for test results," he says.
Apart from a long-lasting assessment period, the claim is also open-ended due to the fact that circumstances may change, and a person who previously was not seen as suffering from a total and permanent disability may do so at a later stage.
Repeat claimants are therefore often an issue with TPD.
Even though this cannot be completely avoided, James hopes the majority of claimants do not have to come back five or six times.
"It is not a nice situation for us when we repeatedly have to decline a claim and it is clearly a very traumatic experience for the client," he says.
The lack of industry consensus and the blurry TPD explanation currently provided have left advisers confused as to what is really on offer. As a knock on effect, this has given rise to even more bewilderment among consumers.
"Everybody thinks they know what it stands for but everybody interprets it differently and advisers often oversimplify and exaggerate this benefit to clients," says Richard Verdin, sales and marketing director at Direct Life and Pension Services.
Because of this, people's expectations of TPD are unrealistically high, something which, in turn, has brought about a number of misconceptions.
"Somehow in translation from adviser to the customer, they have come to think the claiming criteria are less severe. Therefore consumers feel let down by a product of this kind," says Paul Cowman, head of protection at Prudential.
And this is one of the main problems with this benefit, because although it was introduced to give people further protection and effectively make CI more popular, it has instead had the opposite effect.
In order to reverse this trend, the industry needs to improve people's understanding of TPD and ensure customers know what they are buying.
Intermediaries could do so by explaining the element and not just selling it as an extra definition that catches all illnesses not covered by the other definitions.
Verdin believes this would not be a problem for advisers if given proper training.
"If advisers would fully understand total permanent disability, then by default it would improve their clients' understanding too, and we would effectively see the number of declined claims decrease," he says.
Providers could also lend intermediaries a helping hand by publishing claims statistics that include TPD claims.
This could help advisers and consumers understand where the real problem lies. Another approach would be to redesign the benefit completely.
This is likely to happen, says Kirwan, revealing that the ABI CI working party plans to start work on TPD as soon as the current three-year CI definitions review is complete.
One of the ideas currently on the drawing board is to analyse all the data on TPD claims paid to date and then try to classify the claims into a number of categories, such as mental illness or injuries, depending on what the data analysis reveals.
The working party would then produce specific illness definitions for each one of these categories, hopefully not more than five or six, which would then replace TPD.
James thinks the idea may add clarity, however he warns that adding too many conditions to a CI policy would not help.
"Replacing total permanent disability with a number of illnesses may be a sensible idea, but if there are 30 new definitions it would be impossible and you could end up with a very long list of critical illnesses," he says.
Considering all the problems that seem to be linked with TPD, there is a strong argument for scrapping this element of cover altogether.
However, there is a double-edged sword here as ditching it could prove to have negative effects too.
As Cowman argues: "Getting rid of total permanent disability would possibly give consumers more confidence in critical illness cover. However, the downside is that it would also restrict it." Therefore, despite all the side effects, the consensus is that TPD should remain intact until something better comes along because, after all, consumers seem to like the benefit. And what the public wants, the public gets.
COVER notes
• One in two TPD claims are currently declined.
• There is at present no standard definition for TPD.
• The ABI CI working party will commence work on TPD once they have completed the latest CI definitions review.
