Analysis: Individual income protection - the ADL debate

More affordable - but is it harder to claim?

While ADLs might appear to be one way of making IP more affordable, some advisers complain that the concept devalues the product and makes it difficult for clients to make successful claims. Emily Borkowska reports.

Activities of daily living (ADLs) have been described by protection advisers as misleading, unfair and failing to do income protection (IP) products justice. Why then, given the industry’s goal to improve its reputation, are they still being used?

The biggest criticism of ADLs is that the claims criteria are so strict that all but the most severely incapacitated individuals will fail them. The requirement for people to complete three out of five or six activities in order to claim means that a broken leg, a ricked back or even blindness might not qualify.

“Ultimately, the definition for ADLs could leave many potential claimants struggling to meet the required standards to make a successful claim,” says Michael Aldridge, sales director at London & County Mortgages. “Given the historical criticism of the protection industry – valid or not – and when the protection industry is under ever increasing scrutiny around the payments of claims, the presence of ADLs as an incapacity definition not only risks damaging IP claims statistics but also the product itself. There is an argument to say that it doesn’t do what is a great product justice and that it shouldn’t be labelled as IP.”

Cirencester friendly, which does not use ADLs, believes that task-based definitions are not always a suitable way of judging the impact that an illness or incapacity has on the ability of the claimant to do their job.

“If the mechanism used to judge a person’s eligibility for benefit is based on activities like bathing, dressing or climbing stairs etc then claimants might reasonably question their relevance to what they do for a living,” says Paul Hudson, Cirencester friendly’s chief executive. “After all, they are primarily insuring themselves against the risk of losing their income because of illness or incapacity rather than their functional status as a person.”

Some advisers dislike ADLs so much that they have never recommended an ADL plan to clients. One such adviser is Simon Dunn, protection specialist at Julian Harris, who says it is extremely rare that ADLs are the only IP option for clients. He believes an own occupation definition of incapacity should be used wherever possible, even if it means that a provider prices their proposition unfavourably.

Cost

Insurers, however, argue that ADLs enable them to offer cover to people in risky occupations at an affordable cost.

“There are many occupations that we would be able to offer cover on a task-based definition that we would not be able to cover at an affordable cost on an own occupation definition because of the high risk of claims,” says Ian Smart, head of products and technical support at insurer Bright Grey, which has just over 30% of its applicants on a working tasks definition.

Although there are some providers who always offer own occupation definitions, Smart says these companies are not able to cover all risks.

“If all companies did this there would be more people unable to obtain any cover at all. Offering [the ADL] definition gives these people a choice,” he says.

Exeter Family Friendly has offered an own occupation definition to all applicants for several years and brand and marketing manager Nick Jones says there are only a few very risky occupations that it cannot cover.

“If we can do it, I believe other insurers can too, but at the moment it seems that many are squarely focused on protecting the low risk and so-called preferred lives, minimising their exposure rather than offering good IP solutions to a wider range of consumers, for example those in high risk occupations,” he says. “Ironically, the sector of the population which often most needs IP, for example self-employed trades people, is the least well-served by the majority of the market.”

Jones says that by pricing premiums by age and keeping policy frills to a minimum, Exeter Family Friendly can still keep cover reasonably priced. As a result, he does not believe there are any situations when ADLs are useful.

“An IP policy which includes ADLs is just a piece of paper or a tick in a box, not a policy to be relied upon and to provide reassurance. If there is a need to bring down the cost of cover, or manage risk, its far better to use a control that means a policy will still deliver, but a control that is likely to be far better understood and appreciated by consumers. In my mind a far better yet pragmatic solution to manage risk is to shorten the potential payment period on an IP plan, so rather than being paid no benefit a policyholder is at least likely to be covered for long enough to get back on their feet financially in all but the worst illnesses or injuries.”

Steps forward

Some insurers, such as Ageas, LV= and Friends Life, have recognised the mounting criticism of ADLs and have moved more jobs into the own occupation category. Steve Casey, head of marketing and proposition development at Friends Life, says the provider will try to offer own occupation whenever it can.

“Friends Provident, Bupa and AXA were moving towards that goal and continue to do so. When Friends Life’s new offering is launched in October there will be even more occupations for which own occupation will be given,” says Casey.

Friends Life will continue to offer ADLs to very high risk occupations, such as scaffolders and roofers, as well as to people who are not in employment, for example a houseperson.

“It is feasible to only offer own occupation or suited definitions but we would be excluding some covers,” adds Casey. “The argument raises the issue of community rating – should we raise everyone’s rates a bit to pay for the high risk lives?”

Legal & General takes a slightly different approach when applying definitions. If a client is an occupation class three or four and has had 12 months of claims payments assessed against own occupation, the insurer will then assess the client against an activities definition. If the claimant is undergoing chemotherapy, radiotherapy or dialysis they will continue to be assessed against L&G’s own occupation definition.

“Where affordability is a client concern, our approach to occupation classes three and four allows the client to have some own occupation coverage whilst keeping within their budget,” says Alison Manning, Legal & General’s product manager – individual protection. “At L&G we feel we offer a balanced solution whereby all occupations are offered a minimum of 12 months own occupation definition. Occupation classes one and two remain on own definition but threes and fours, our more risky occupations, are offered the switch definition to activities after 12 months of own occupation. This approach has helped us keep the cost of cover for occupations three and four more affordable.”

Some would argue that an IP plan with ADLs is better than nothing, but advisers believe consumers should be given more choice than this. Matt Morris, senior policy adviser at LifeSearch, says clients should be offered own occupation first and if the premium is prohibitive they can then opt for ADLs. “It should not be a case of ADLs or nothing,” he says. What’s more, with friendly societies offering terms to all but the most high risk occupations, it is very unusual for ADLs to be the only option available.

“Friendly societies don’t differentiate between low and high risk applicants but they still offer affordable plans,” says Alan Lakey, senior partner at IFA firm Highclere Financial Services. “As a result they get a higher share of high risks and I do have to be cautious, but I will still use them for some clients in low risk occupations because it makes sense for them.”

If insurers want to avoid losing business to friendly societies and improve the reputation of IP, a move away from ADLs seems to be a logical and necessary step forward.

A typical ADL

Legal & General requires claimants to be unable to perform at least three of the following six activities:

  • Bending – the ability to load and unload a standard front-loading washing machine.
  • Communicating – the ability to hear (with aids) and speak with sufficient clarity to be able to hold a conversation in a quiet room in your first language.
  • Reading – have the required eyesight to read a daily newspaper, using glasses or other visual aid if required.
  • Fine motor control – have the ability to remove five paracetamol from a blister pack.
  • Walking – the ability to walk 200 metres (on flat ground) to a local shop or bus stop for example, without stopping due to breathlessness or severe pain.
  • Lifting and carrying – the ability to lift a 2.5kg bag of potatoes from mid-shin height to waist height and carry it five metres.
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