Nothing is more certain than death and taxes. In the good old days, life insurance was easy. Payment...
Nothing is more certain than death and taxes. In the good old days, life insurance was easy. Payments were made on death and the boundary between valid and invalid claims was fairly clear.
Unfortunately, claims managers today have no such luxury. Day in, day out they face the challenge of disability insurance products where claim decisions are coloured in shades of grey. For both them and insurers, a key question is: "How can sickness or disability be best measured?"
Disability insurance, whether PTD or income protection, is usually measured against the clients ability, or inability, to carry out the duties of an occupation which may be their own. There are a number of reasons why occupation is used as a means of measurement, including:
l Loss of earnings is a principle worry of clients and this is closely related to ability to work.
l Advisers and clients can easily relate to the circumstances under which a claim may be payable.
l Underwriters have a basis of measuring risk by occupation.
l Claims managers have a benchmark against which to assess the abilities of a claimant.
However, difficulties can and do arise with occupation definitions, primarily where the interpretation of the disability definition differs significantly between the client, their adviser and the insurer. Here we review some of the key risk management issues surrounding occupational disability measures and consider some of the alternatives.
Own occupation
'Own occupation' definitions of disability provide the client with cover against being unable to carry out their own occupation as a result of sickness or disability. Own occupation policies offer comprehensive cover and are the favoured option among IFAs.
There are, however, many occupations that may be too high a risk for insurers to consider on an own occupation basis. These can be grouped into those occupations which:
l Require specialist skills that are at high risk of loss, for example surgeon or musician - any damage to a surgeon's hands could lead to them not being able to continue their profession; a musician may be dependent on their voice.
l Have irregular work patterns, for example an actor or writer - they may find it difficult to find work due to the nature of the industries involved. The cyclical nature of this feature may lead to anxiety and depression.
l Require some form of licence to carry out the role, for example an airline pilot or taxi driver - it may be relatively easy for clients in these occupations to lose their licence and therefore be unable to work and able to claim.
l Exhibit a high risk of accidents, for example window cleaner.
These clients represent a high risk of claim. Clients in this category are not only unsuitable for an own occupation definition but may be declined from coverage altogether.
Alternative definitions
To offer cover to higher risk occupations, insurers generally offer disability definitions on either an 'own/suited occupation' or an 'any occupation' basis.
The first reduces the risk to the insurer by removing the link exclusively to the client's own occupation. The client needs to be unable to perform both their own and any other occupation to which they are suited by training. Take, for example, the case of a surgeon. Damage to their hands may lead to disability on an own occupation basis, but on an own suited definition, the surgeon could follow an occupation in the medical field suitable to their skills.
Unfortunately, there is still a degree of subjectivity within this definition. What is a 'suited' occupation? Differences of opinion are almost certain to arise between claimants and claims managers. While the latter attempts to be as objective as possible, it can be difficult to define suited occupations for each individual. Many insurers believe that the difference between own and own/ suited is, in practice, small.
The any occupation approach reduces the risk further. A claim under this definition is one where the client is so disabled that they cannot follow any occupation whatsoever. The cost of this type of cover is likely to be a lot less than that of an own occupation definition, due to the much stricter claims definition. Any occupation policies allow disability insurance cover to be offered to those the higher risk categories.
One problem with any occupation is its unattractiveness to clients. A secretary that develops RSI so is unable to use a keyboard might be unhappy to be told they need to change career and become something else, such as a traffic warden, for example.
A second problem is what is meant by 'any'. In the case of Sargent vs GRE, the claimant was awarded the claim as the term 'any occupation' had to be limited in its context to any relevant occupation. It is not normally possible to add words to a provision of this nature, for example any occupation 'at all'. So the claimant was in effect awarded a claim on an own occupation definition.
New approaches
Insurers have recognised this problem not only with changes to policy wordings, but also with new types of disability measures. To offer a more robust type of policy than any occupation, the market is developing new measurements of disability. These are commonly known as 'functional assessment tests' or 'work tasks'. These definitions are being used in both PTD and income protection products.
The origin of these tasks is the DSS all works test, which has recently been upgraded to the new personal capability assessment. The PCA considers the ability to perform a range of specified everyday activities and is designed to reflect the point at which a person's ability to perform physical and mental activities is reduced to a point at which work becomes impossible. This type of test does not specifically measure occupational ability. Using work tasks should remove the subjectivity associated with occupational disability measures.
UNUM was a pioneer in this field, introducing work task definitions on one of its income protection policies in autumn 1997. Since then, an increasing number of companies have introduced such definitions on their IP and PTD products. For example, Scottish Provident has included the work tasks definition on its Self Assurance product range.
Increasing objectivity
This type of 'objective' definition is not new to insurers. A number of critical illness products cover loss of independent existence, which is measured by looking at activities of daily living (ADLs). However, these are not appropriate for clients of working age - quite simply, they require the client to be massively disabled in order to qualify.
These work tasks definitions remove much of the subjectivity that exist with occupational definitions. 'The ability to walk 200 metres unaided on a flat surface' should be relatively straightforward to measure, providing a simple yes or no in most cases. However, if the definitions are not clear enough, there may be misinterpretations.
In addition, experience from long term care policies shows that there are still shades of grey - what happens, for example, if the client almost fails four work tasks? Will the policy pay? The hope is that work tasks will lead to fewer claims disputes, although whether this will actually be the case remains to be seen.
In addition to aiding claims assessment, underwriting should also be made easier. Occupational loadings or assessments will be required on higher risk occupations only. Work tasks should also offer insurer the opportunity to expand the market for disability insurance into 'higher risk' blue-collar sectors. Cover could also be made available, at a fair price, to those who may currently be uninsurable, for example housepersons, the unemployed and those taking a career break who do not have a defined occupation. The cost of such policies will also be lower than occupational-based policies due to the more stringent claims criteria and reduced subjectivity.
A final key issue for insurers is to ensure that the customer is made aware that the policy is not linked to the ability to follow an occupation.
In an ideal world, insurers would offer everybody disability insurance policy based on an own occupation definition. Painful experience has taught us, however, that in the real world own occupation can represent too much of a risk for some occupations or prove to be too expensive for certain occupations.
Wider definitions of disability can help. Work tasks hold out the prospect of enhancing cover for many, as well as reducing risk for the insurer.
Deepak Jobanputra is senior actuarial assistant at GeneralCologne Re
