The decision of whether or not IP or CI will be regulated by the FSA ultimately lies in insurers' hands,says Nick Kirwan
Now that long term care insurance (LTCI) is to be regulated, some people are wondering whether the Government will decide to regulate other health insurance plans too. The outcome may lie in the industry's own hands.
One reason why the Government might step in to regulate critical illness (CI) and income protection (IP) would be if self-regulation is perceived to be failing. This begs the question about what might cause this to happen.
CI and IP are both regulated by the ABI through a number of codes and statements which lay down rules for sales, policy design, marketing material, policy documentation, underwriting, administration and claims procedures. The Statements of Best Practice for Critical Illness and Income Protection, the Statement of Long Term Insurance Practice, the Code of Selling Practice and the recently published Genetics Moratorium all come into play. If the industry fails to embrace these in both letter and spirit, we can hardly be surprised if the Government steps in.
Another potential banana skin is how the industry handles the explosion of CI claims we know will follow the recent flood of sales. Around eight million people, including two million children, may now be covered by four million CI policies. Of these, about a third have been taken out in the last two years alone. When policies are first taken out, due to the effect of underwriting, there is a 'claims honeymoon' period ' actuaries call this the 'select effect' and cost it into the price. As this effect wears off on the millions of policies taken out in the last few years, and as the people covered get older, we expect the number of CI payouts to go through the roof.
How the industry handles these claims could directly affect the reputation of CI cover, especially if problems reach a wide audience through the media. Of course, the flip side of this coin is the fact that every time a CI policy pays out as expected, it is the best advertisement we could ask for.
Let us hope we do not get regulation by accident. The regulations for LTCI have yet to be drafted so we do not yet know how it will be ring-fenced from other types of health insurance. Of the responses to this issue in the consultation document, no less than six of the suggested definitions could inadvertently catch other types of cover, for example, permanent and total disability benefits, waiver, IP and CI. We must ask the Financial Services Authority (FSA) to get this right.
In today's consumer society, there is a trend towards more statutory regulation. While this is good for consumer confidence in financial products, it can also increase the cost of providing them.
If CI and IP avoid statutory regulation, it will be because, as an industry, we have demonstrated that self-regulation works, we have embraced the ABI rules, we have paid all genuine claims without hassle, and we have given consumer groups no major cause for concern.
