Confused? You will be. How would you define 'permanent total disability' (PTD)? As its name suggests...
Confused? You will be. How would you define 'permanent total disability' (PTD)? As its name suggests, it is a disability that is both total and permanent. In reality, the answer is not, unfortunately, quite that simple, and the large proportion of critical illness PTD claims that are turned down is evidence of the confusion that surrounds this particular policy definition.
According to figures from ERC Frankona, almost two-thirds of PTD claims under critical illness (CI) cover are rejected and of those 80% are because the claim has not met the definitions of 'permanent' and 'total'. The benefit is quite clearly misunderstood - by those buying it and those trying to claim under it.
Roger Edwards, product marketing manager at Scottish Provident, says that it is a benefit where people tend to claim because their condition is not otherwise listed on their policy, irrespective of its totality or its permanence.
He says: "PTD has always been sold as catch-all benefit on critical illness - we have even had a claim for a broken wrist, which even on an own occupation contract would not stop the claimant working forever. The benefit needs to be properly explained."
But with no standardised set of definitions coupled with subjective occupational assessments, is it any wonder that practically everyone bar the insurers is confused?
Peter Fenner, marketing analyst at ERC Frankona, says: "It seems to be the concept of both permanence and totality that throws people. Being totally disabled is usually something that can be proved or disproved, but establishing that the condition is permanent can often be much harder. For example, many people will feel totally disabled if they break a leg, but it would be unusual if they failed to recover."
Eligibility under PTD is therefore far from black and white. Add to this occupation-linked definitions and the product becomes yet more confusing. This is because claim payment will ultimately be dependent on the policyholder's ability to work either in their own occupation or in a similar occupation, or whether they can work at all, according to their policy.
Own occupation cover means the benefit will pay out if the policyholder is no longer able to perform their own occupation while any occupation cover will pay out if they are no longer able to work in any occupation at all. Under the more recent addition, suited occupation, the benefit is only paid if the claimant can no longer do their own occupation or a related occupation as suited by education, training or experience.
This may be how the definitions are described in the terms and conditions of the policy, but how do they work in practice?
Ross Ainslie, product actuary at GeneralCologne Re, says the distinction between any and suited occupation is not at all clear when it comes to claim.
"Any occupation is now treated as being close to suited - there is in practice not an awful lot of difference between them," he says. This means that insurers may be more flexible on an any occupation definition.
"For example, if a financial director had a nervous breakdown through stress, it would be reasonable for them to take another, less stressful role within the company, such as a supervisor in the accounts department, if they had an any occupation policy. But it would not be reasonable to expect them to be the person who moves the furniture around in the office."
But this degree of leniency was not actually intended in the original pricing of the any occupation product and was somewhat forced on insurers in 1997 when a court case between a policyholder and the Guardian Royal Exchange interpreted any occupation as 'any reasonable occupation'. As a result, the price differential between own and any occupation PTD is narrowing. However, even though any reasonable insurer is not likely to refuse an accountant, their benefit on the grounds that they could get work on a building site, an own occupation definition is always preferable.
For people in highly specialised occupations, such as dentists and surgeons, this may not always be possible as they represent a greater risk to the insurer.
Nick Kirwan, manager of product development at Pegasus, says: "In some occupations it only takes a small injury to stop you doing your job. A brain surgeon, for example, is reliant on dextrous fingers."
Anti-selection
To offer high-risk groups own occupation PTD can also introduce an element of anti-selection. Anecdotal evidence from one insurer tells of a dentist who made a fortune when he lost the sensation in one of his fingers, because he had the foresight to set up policies with several providers.
Kirwan says that Pegasus is careful about to who it offers own occupation PTD cover and only offers customers the best definition that it is able to.
He says: "An accountant, for example, would get own occupation cover but somebody in a more specialised job would be offered suited occupation. This means a pilot would be expected to take a ground job or a management position if they were fully fit and able but not able to fly."
Scottish Provident has an alternative approach and is prepared to offer surgeons own occupation PTD, but to compensate for the additional risk the premium is loaded rather than the case turned down.
"We can see that a surgeon does have a specialised job, but what use is any occupation to a surgeon? Own occupation PTD is a valued benefit in this market," Edwards says.
Insurers offering own occupation cover, in particular to higher risk groups, do tend to be those focused on the IFA sector. Kirwan says: "Direct customers do not ask as much of their provider, but IFAs are aware of the best cover and they will demand it for their clients."
Ainslie agrees: "IFAs want their clients to have the best product and they want own occupation cover, especially if they have professional clients. It only takes one provider to offer own occupation PTD to high-risk groups for more to follow."
So it seems there are problems on each side of the fence. Consumers do not understand the product, while insurers are wary of exercising too much flexibility in case they are flooded with claims. But some providers are working towards a more objective method of assessment that will be easier for the customer to understand.
Fenner says: "To try and make definitions clearer, some offices have moved away from definitions relating to the policyholder's ability to perform undefined occupations to using ones based on activities of daily working (ADWs) where the basis of a valid claim is both explicit and objective."
These are a useful alternative to activities of daily living (ADLs) which are used by some insurers on PTD claims and are hard to fail, according to Ainslie.
"This type of assessment is more flexible and is pitched at a more modest level of disability, assessing the claimant's ability to work rather than their ability to live independently," he says.
Both Scottish Provident and Pegasus are now using this method of assessment instead of the more conventional any occupation definition. Edwards says: "An any or suited occupation definition can be quite subjective and we find that this method fits in with our customers' expectations and they understand it more easily."
To clarify the situation further, some quarters have proposed that the ABI extends its set of standardised definitions on critical illness policies to PTD.
Kirwan says: "We have been looking into this and we have issued standardised definitions on some of the terms around PTD such as 'occupation', 'permanent' and 'irreversible'. By standardising these aspects, we have created a stepping stone to a full definition." But he adds that while this may help the situation, assessments are still subjective.
In reality, PTD claims under CI contracts are less of a problem than they are under standalone schemes. When it was first introduced on CI contracts, PTD was seen as a sweep-up benefit for claimants that became seriously disabled, in accidents for example, but could not claim under the list of conditions.
But products have moved on. Edwards says: "We have now introduced more conditions such as paralysis, loss of sight and loss of limbs, so what were previously PTD claims are now listed conditions in their own right." As a result, the number of PTD claims is small.
However, Kirwan says that bigger problems arise on standalone PTD. While few individuals purchase standalone PTD, it has a role in the employee benefits and business protection market. Injecting a cash lump sum into the business when a key person is permanently and totally disabled is a useful benefit and a cheaper alternative to full CI cover. It can also be purchased by the employer to fund an early ill health retirement pension.
Despite its problems, PTD is a useful benefit, allowing policyholders with unusual conditions, and those that are victims of serious accidents, to make a claim on their CI policy.
According to GeneralCologne Re, claims are coming in at the same rate as stroke claims, but only a third are being paid. While many of the claims submitted do not even come close to a PTD definition, each refusal leaves a dissatisfied customer and promotes a tarnished image of the product. So it seems there is no better time for IFAs and insurers to rally together to address the problems surrounding PTD.
A hard task this may be, but introducing more objective methods of assessment and helping policyholders understand what they are and are not covered for, would be a good start.
