Insurers are taking steps to reduce the “disproportionately” high number of claims the industry rejects for total and permanent disability (TPD) on critical illness cover.
Cover for TPD is offered in most critical illness policies and will pay a cash lump sum if the claimant does not expect to ever return to work or has their “daily living activities” curtailed, due to illness or injury.
But few TPD claims are successful. Even though the number of claims for TPD only account for about 3 per cent of all claims for CI, about 55 per cent are rejected.
This has not escaped the attention of the Financial Ombudsman Service which says it has concerns with about one third of all its CI complaints relating to TPD disputes.
Now the industry is looking at ways to tackle the rejection rate, which is says it down to the fact each insurer treats TPD differently.
“There is no model definition for TPD so each insurer uses it owns definition to assess whether someone has become totally and permanently disabled,” says Nick Kirwan of the Association of British Insurers.
“These range from being permanently unable to return to the person’s “own” occupation or any “occupation” or unable to perform a defined number of specific tasks.”
“It is not clear enough to individuals where the line is drawn when their claims are assessed.”
Under new proposals put forward on Wednesday, the definitions of TPD currently used by insurers would be swept away and replaced with a series of standardised, specific conditions which would not be related to a return to work.
The new definitions, which include back pain and mental health conditions, the most common claims for TPD, should make it clearer to consumers what their policies will and will not cover.
“What we are proposing will draw a line in the sand for customers,” says Kirwan. “The definitions are objective.”
For example, for a claim to be successful for a mental health condition, the claimant would be required to have been an in-patient in a psychiatric ward for at least eight nights, with any claims for mild stress or anxiety excluded.
Specific surgical procedure would need to have been undertaken for a TPD claim for backpain claim to be successful, with the removal of a disc or spinal injections not covered.
In spite of the clearer guidance, set out in its latest Statement of Best Practice for CI, Kirwan does not expect more claims to be declined or premiums to increase.
“We have devised a set of model definitions that if added to CI policies together aim to provide similar cover, but will be clearer to customers about what is and is not covered,” he says. “We expect it to be neutral on premiums.”
The ABI says the intention of the TPD proposal is to make a clearer distinction between CI and Income Protection policies, by removing definitions from CI based on occupation. It also proposes to introduce a new model definition for ‘Loss of the physical ability to look after yourself’ ” and clearer guidance on terminal illness definitions.
The proposals are open to consultation over the next three months. But while welcoming the changes as a step forward for clarity, consumer groups said the industry still needed to tackle the slow rate at which current claims are processed.
“There is huge room for the industry to tighten up its claims handling procedures for CI,” says Which? the consumer rights group.
“If you are in bad physical shape you don’t want to be waiting for months for a decision about your claim, or battling for your payout.”
Meanwhile, independent financial advisors say eliminating TPD as a problem will be “a boost to the industry in the long term”.
“Non-disclosure appears to be an ever-decreasing problem now so it makes sense for the ABI to tackle the other reason for claims being declined, which is ’not meeting the definition’, says Matt Morris, senior policy adviser with LifeSearch, the protection brokers.
The proposals will see TPD drawn into line with other conditions on the policies, including cancer, heart and stroke, which are subject to strict definitions on which they will pay out.
The TPD proposals are the latest in a series major revamps to the critical illness policies, once dogged by reputation for poor payouts.
In recent years insurers have taken steps to improve the clarity of application forms, and handling of claims rejected for non disclosure. About 90 per cent of all CI claims are now accepted.
It is estimated that about 2.8m critical illness policies have been sold in the past five years.
But any changes to the TPD definitions would only apply to new policies taken out after any changes in the new Statement are adopted by insurers, with a deadline for implementation of the end of 2010.
