By protecting policyholders from the financial consequences of serious ill health, there is an overlap of cover between income protection and critical illness. But the similarities stop there as both products show a very different claims experience.
Critical illness insurance was introduced to the UK market in the mid-1980s. But while the product has been around for some time, sales have only taken off in the last five years. So from the claims point of view, it is still early days, especially when you bear in mind that critical illness is normally written on a 20-25 year term or whole of life basis. This means claims experience is limited and no major concerns have yet been identified.
Poor experience
However, the story for income protection is somewhat different. Policies have been available for much longer than critical illness but it has proved to be an unprofitable line of business for the majority of providers.
This poor claims experience is due to a combination of factors. Poor policy design has encouraged claimants to remain off work rather than returning to their employment, because they are better off not doing so.
Likewise the underwriting philosophy has responded slowly to emerging trends, continuing to allow an own occupation definition for certain occupations when one based on any occupation or activities of daily living (ADLs) would have been more appropriate. In addition, poor claims management, such as a failure to act early enough or an unwillingness to promote rehabilitation, has meant that by the time the insurer becomes involved, many claimants have already settled into a claims mentality.
On the whole, critical illness claims are easy to administer and validate - the claims team simply needs to establish that the specific criteria in the definition have been met. In the majority of cases this is a straightforward exercise, as it is an objective decision based on the evidence provided and in most cases presents little difficulty.
However, for income protection claims the process is somewhat more complicated. Traditionally, the definitions used are occupation-based, with a degree of subjectivity as to whether or not they have been satisfied.
But are these really two different stories, or are we just at different stages in the same story?
Critical illness sales increased from 100,000 in 1990 to over 780,000 in 1999. In a similar period, approximately 7,000 critical illness claims have been admitted.
When the product was first launched, most insurers covered only the eight core conditions now defined by the ABI:
l Cancer.
l Heart attack.
l Stroke.
l Coronary artery by-pass graft (CABG).
l Major organ transplant.
l Kidney failure.
l Multiple sclerosis.
l Permanent and total disability (PTD).
Today, over 40 conditions can be covered, yet, despite this extension of cover, 97% of claims arise from the seven core conditions and PTD. In fact cancer, heart attack and stroke alone account for 80% of admitted claims.
The overall ratio of male to female claimants is 65:35, although for some conditions there is a significant difference. For example, 95% of CABG and 90% of heart attack claims arise from males, while cancer claims are much more evenly split, the ratio being 45:55 male to female.
Some 21% of critical illness claims are declined. Of these, 70% are rejected because the definition has not been satisfied.
The ABI has produced recommended definitions which should now be used by insurers, who will usually provide explanatory leaflets describing exactly what is and is not covered.
While some of the definitions are necessarily medically specific, intermediaries should be able to give clients a reasonable understanding of the cover provided; it may take a little more time but ultimately it has to be better for everyone if clients know the true extent of their cover.
Investigation
Non-disclosure accounts for 22% of declinatures. Where a claim arises in the first year after commencement, the insurer will always investigate the possibility of non-disclosure. It is vital that intermediaries ensure clients answer the actual questions asked. For example, if the proposal form asks whether they have seen a specialist or had hospital investigations in the last five years, the insurer wants to know each and every such occurrence. Non-disclosure usually arises when proposers seek to underwrite themselves, omitting what they think is insignificant. If in doubt, err on the side of caution and disclose.
PTD claims are particularly problematic. Some 57% of PTD claims notified between 1991 and 1997 were declined, usually because the definition had not been satisfied. The typical definition requires the claimant to be permanently and totally disabled from any occupation. These are very strict criteria and few cases are likely to satisfy them. Permanent does not mean disabled for a few months or even a year, it means ongoing disability from which the claimant is unlikely to recover; any occupation means any reasonable occupation depending on the claimant's work history. Taking time to explain the cover provided could help prevent problems at the claim stage.
Income protection providers are also having problems. Claims are being admitted at a greater rate than was expected and once admitted are staying in payment for longer. There is a broad spectrum of claims management experience in the market; at the least experienced end, offices are admitting twice the number of expected claims and terminating only 30%, based on standard actuarial data.
Claimants
The average income protection claimant is male, in his early 40s, with a class one occupation and is likely to be diagnosed with either anxiety or depression, or a musculo-skeletal complaint, or a mixture of both. His claim is likely to last in the region of five years, paying an annual benefit of £11,000. In the early 1990s he was likely to be involved in the building trade, now he is much more likely to have a professional occupation.
The proportion of male to female claimants is 80:20, although the proportion of male claimants looks higher because there are considerably more male policyholders. While the major causes of claim for both sexes are similar, there is a higher incidence of mental illness claims from women and musculo-skeletal claims from men. These two conditions alone account for over 50% of all income protection claims.
Experience has shown that if a claimant has not returned to work within two years of claiming, the likelihood of doing so is considerably reduced - chronic illness behaviour sets in and any motivation to return to work disappears.
While claims experience has been good for critical illness so far, the major worry for insurers looking to the future is that having sold high volumes of critical illness, claims experience could be adversely affected by outside factors, particularly advances in medical science. For example, cancer screening is becoming more common and conditions like breast and prostate cancer are likely to be diagnosed earlier, leading to more claims. Similarly, current diagnosis of multiple sclerosis is made after two definite neurological episodes which may be years apart, but new treatment regimes may lead to the diagnosis being made on the first incidence.
However, the standardisation of definitions by the ABI for critical illness is to be encouraged; policies should be easier to explain and easier to understand. This should ultimately lead to fewer declinatures.
Improvements
The future for income protection claims should be brighter. The increasing use of objective definitions based on activities of daily living or work rather than subjective occupation-based criteria will mean fewer disputes, because the assessment is measured against set criteria by a healthcare professional, typically an occupational therapist.
More and more insurers are recognising the need to act early once notified of a claim. Rather than wait for the end of the deferred period, they are increasingly looking to take steps to suggest and provide help with rehabilitation programmes.
These are still in their early stages, but it is not too difficult to envisage in a few years time income protection policies being sold with a specific rehabilitation benefit designed to cover private treatment once a prognosis of disability past the deferred period is available. There is, in addition, increasing co-operation between insurers and government initiatives such as the New Deal for the Disabled.
Traditionally, claims has been the 'Cinderella' department of the life office - under-resourced and with little professional expertise. But times are changing and there is now a realisation that an efficient, professional department with the right range of skill sets and level of resources is good for everyone.
Claimants receive a good service, valid claims are paid quickly, invalid claims are detected and rejected and qualitative and quantitative data can be fed back to the underwriting and pricing departments and ultimately new products designed - which has to be to everyone's advantage.
Peter Barrett is life and health claims assessor at Swiss Re Life and Health
