What are the risks of not upgrading a CI policy?

Newspapers recently highlighted the case of Hein Pretorius who suffered severance of a leg due to a motorcycle accident and subsequently suffered declinatures on critical illness plans he held with Bright Grey and Legal & General.

The policies were arranged some years back and used a historic claim definition that required loss of two limbs - only Forester and NFU Mutual persevere with this wording.

The Ombudsman service rejected his complaints because the insurers were correct in that his condition did not mirror the requirements within the policy wordings.

Mr Pretorius is reported to be considering legal action against his adviser on the basis that the he should have been advised to upgrade to a plan which would have covered loss of a single limb.

This situation has occurred before and highlights two industry problems, firstly the imbalance created when a consumer is able to consider legal action if the FOS reject his complaint - advisers are denied an appeal mechanism if they lose at the FOS.

The second is the dilemma all advisers face, whether or not to re-broke and upgrade a client's critical illness plan.

You might reasonably ask why wouldn't an adviser seek to enhance his clients' protection?

Could it possibly be that some networks and compliance departments consider re-broking as akin to churning? Might it be due to a fear that the FOS will have cause to consider the re-broking advice as suspect?

Conceivably some advisers might not possess the confidence to analyse competing plans and thereby produce a valid assessment?

Let's look at these potential problems. Among compliance departments I find a wide range of diverse views with some believing that existing plans are best left alone whilst others contest that, like any other product, it is deserving of regular reviews.

To clarify, re-broking is where the client is advantaged and churning is where the exercise was for the benefit of the adviser alone.

Both advisers and compliance officers are wary of the ombudsman service due to its regular habit of ignoring both logic and the law.

Many consider that the ombudsman service simply does not understand these plans and this lack filters through to its decision-making.

Sometimes a re-broking analysis highlights a clear course of action. By way of example, a CIExpert comparison between the current AIG plan and a 2008 Scottish Provident plan demonstrates that AIG offers 52 advantages over the existing plan with not a single disadvantage showing.

Assuming both cost and underwriting allow it would seem that re-broking is a reasonable course of action.

However, what happens when the existing plan offers some form of advantage over the latest version?

Comparing the same current AIG plan with that of the 2008 Bupa plan shows 51 advantages to AIG but also highlights 3 where Bupa has the advantage.

Now the adviser has the task of applying values to all 54 differentiating conditions in order to reach a conclusion regarding both value and best advice.

Bupa's advantages are coronary angioplasty, type 1 diabetes and chronic rheumatoid arthritis and the adviser must establish relative values for these against the apparently overwhelming weight of the 51 disadvantages.

This might appear relatively simple but, when the comparison involves loss of the historic cancer definition that paid early-stage prostate cancer on diagnosis, the calculations become more difficult.

FOS requires that any re-broking exercise involves must involve pointing out the any disadvantages, if any, as well as the advantages.

With the policy improvements made in recent years the disparity between existing and new plans can be considerable.

The case of Hein Pretorius serves this well. For example when you consider the statistical likelihood of a claimof meeting the definition for a single limb versus loss of two limbs there is in the order of a 10:1 differencelikelihood of a single limb being severed.

Incidence levels are considerably higher for men, but for both genders the likelihood of meeting the two limb definition is minimal.

Arguably a review of any policy with such inferior definitions is in the client's best interest and should be the overriding priority.

If an adviser upgrades a client's plan to ensure that it offers more comprehensive cover he runs the risk that at the claim point it might be discovered that the older plan offered a more beneficial wording and a complaint might arise.

As with the recent case, should an adviser fail to upgrade, or even suggest that the existing plan be retained, a complaint might similarly emanate.

It has been generally been assumed that the risks of re-broking are higher and for many has encourage a head in the sand approach, however as this case illustrates the balance of risk has changed.

The only feasible route for advisers is to focus on the best outcome for their client andthe provision of a fully compliant report that highlights both advantages and disadvantages and sets out a clear assessment of the competing plans with the definition wordings shown for both plans.

Alan Lakey is director of CIExpert 

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• Critical Illness
• Critical Illness