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?
This can make it very difficult to assess claims if there is any room for doubt. While claims assessors across the industry will make every effort to treat customers fairly, there’s an obvious tension if two people with very similar conditions are seen to receive different sums.
While it’s true that severity-based products may pay out for conditions not covered under traditional CI policies, there are other examples, such as a diagnosis of cancer or MS, where a condition could receive a full payment under CI cover, but a much smaller payment – around 25% – through the severity based route.
More than 90% of critical illness claims fall under six conditions, so I would argue it’s much better to concentrate on the most significant conditions, where customers are most likely to benefit, while keeping the contracts relatively simple and understandable.
Mike Weedon, Life cover for all
Since the first CI policy in 1983, we have seen a number of improvements – but who’d have thought 28 years after the ‘dread disease’ concept, covering four conditions, we would be offering a policy covering 161 conditions?
Although I believe in the concept of partial payments, I still believe non severity based contracts have a role to play – interestingly the four conditions covered in the original CI contract still account for a large proportion of claims made today.
So what are some of the potential drawbacks of severity based contracts?
Whilst I would never advocate selling CI on price alone, most clients do have a finite amount of disposable income available. By selecting a more comprehensive plan there is obviously a price to pay and premiums are often increased by anything up to 20%.
A small number of conditions may only get a proportion of a payout on a severity based contract opposed to a full payout from a mainstream provider. Another potential problem with severity-based products is that the process includes subjectivity and interpretation before a claim will be paid.
After all, somebody has to judge the severity before the claim is made – this also determines the amount of payout. So, to conclude, with providers continually enhancing mainstream CI products by enhancements through ABI+ definitions, mainstream products may well offer clients the cover they are after. If a customer wants simplicity rather than uncertainty, severity based contracts may not always be the answer.
