Analysis: Critical illness – the pros and cons of partial payments

An increasing number of critical illness providers are offering partial payouts, as Tessa Norman reports

An increasing number of critical illness providers are offering “partial” payments to customers with less serious conditions. But does the potential of more pay outs necessarily mean better cover? Tessa Norman reports

With the so-called illness race slowing down and ABI+ (“Association of British Insurers plus”) definitions becoming little more than a numbers game, critical illness (CI) providers are looking for new ways to differentiate themselves from the competition. Increasingly, insurers have been looking to partial payments – where claimants receive a proportion of the sum assured if their condition meets a less severe definition than the full one – to add value.

Early stage cancers have proved a logical starting point for the industry in this new battleground, but with providers beginning to add further conditions to their partial payments list, some are starting to question whether this is the beginning of yet another pointless numbers game.

The partial payments revolution was kicked off in September 2007, when PruProtect launched its serious illness cover, an entirely severity-based product. Since then, other providers such as Aviva, Friends Life, Bright Grey and Scottish Provident have gradually been introducing partial payments for certain conditions, with the latest change coming from LV= just last month.

But are partial payments on these conditions truly adding value for the consumer in the same way they do for cancer, or are they merely making CI overly complicated?

SELLING POINT

“From an intermediary perspective, the addition of partial payments is a really positive move as they are a great selling point,” says Sarah Fullaway, director of OVISO, a specialist protection adviser. “When providers began adding partial payments for mastectomy, that was the unique selling point which we used to sell one policy over another.”

However, Fullaway says she would only want to see partial payments offered on conditions where they would make a genuine difference to the consumer, a point which providers are keen to emphasise.

“Our starting point on partial payments was to recognise that there are certain conditions which do not meet the full CI definition but still have a tangible impact on people’s lives,” explains Mark Jones, head of protection at LV=, which recently added another five conditions such as severe Crohn’s disease and partial loss of sight to its existing partial payments list of prostate cancer and ductal carcinoma in situ (DCIS), the most common form of non-invasive breast cancer.

“We sometimes get into silly discussions within the industry about the technical ‘level’ of illnesses, but for the majority of people, their reaction on being diagnosed with cancer will be the same, regardless of its severity.”

Bonnie Burns, product development director for Legal & General’s protection business, says the insurer first started looking at the concept of partial payments after conducting some research with Macmillan Cancer Support.

“Macmillan has done a lot of work on the hidden costs that people suffering from cancer face, such as wigs and hospital parking charges,” she says. “We wanted to find a way of covering some of those additional costs, and were keen to make sure that we were catering for a real need.”

Burns says Legal & General will look to offer more partial payments in the future, but only on conditions which stand up to the same principle of customer need.

NUMBERS GAME

But despite this, many in the industry are concerned that it will not be so easy to put the brakes on a competitive market.

“At the moment we are seeing a slow and steady slide towards a PruProtect-style product,” says Mick James, business development manager at RGA UK, the reinsurer.

“That is likely to continue, but I think insurers will keep adding full payment conditions too. In my view, this merely adds to the complexity of the product and makes it more difficult for intermediaries to sell, but although the market is tired of this game and would love to put the brakes on for a while, in a competitive market there is always going to be one provider that wants to add more conditions.”

Ian Smart, head of product development and technical support at Bright Grey and Scottish Provident, also believes that competitive pressures will ensure providers continue to add more partial payments over the coming months and years.

“IFAs tend to gravitate towards the longest list of illnesses, because they want to ensure their clients have the best possible chance of the policy paying out,” he says.

However, few would deny that so far the addition of partial payments has had a positive impact on the industry’s reputation.

Claim rejections for mastectomies, for example, have generated bad press in the past, and partial payments are a way of counteracting that.

“One of the criticisms of CI is that you have to be incredibly ill for it to pay out, but partial payments can help to dispel that idea,” says Burns. “They will lead to more people being able to claim, and as long as we keep the balance right on affordability and customer understanding, then that is a good thing for the industry.”

TOO COMPLICATED?

Customer understanding is a point that is returned to time and again by both critics and supporters of partial payments. Smart, for instance, believes there is a tipping point where a severity-based product becomes too complex for the consumer.

Bright Grey and Scottish Provident currently offer partial payments on low grade prostate cancer and DCIS, and Smart says while he will keep an eye on extending this, he would not want to offer it on every condition.

“I think this is a natural extension of the illness race,” he says. “We have almost exhausted the list of full payment conditions, and now we need to look at new ways of adding value to the policy. But we believe a product like PruProtect’s is extremely complicated for the consumer and there is a danger that people will expect higher amounts of cover than they actually have.”

But Phil Jeynes, head of account development at PruProtect, says it is in fact simpler to have a product that is entirely severity-based than one which is only partly so.

“I think it is a more complicated discussion to say we will pay out the full sum assured on some conditions, but only part of it on others,” he says.

However, Smart argues that consumers may simply register the name of a condition and assume they are covered, rather than understanding there are several definitions within that for varying levels of severity.

“There is a lot of confusion around CI, so before we make things more complicated we need to address consumer understanding on a much lower level,” Smart says.

But from an intermediary perspective, added complications may be no bad thing.

“The addition of partial payments highlights the need for advice,” explains Michael Aldridge, sales director at London & Country Mortgages, the advisers. “A good intermediary can cope with the complexities of various products, but a consumer using a comparison website would really struggle to understand the differences in contracts.”

He says that on the whole partial payments are to be welcomed, but warns there is a danger that providers may start adding partial payments where they could have improved the full definition instead.

“I would say it is a good thing as long as consumers don’t receive a partial payment where they could have received a full one,” he says.

Aldridge also points out that for some conditions, the likelihood of receiving a claim is so low that it becomes a pointless addition.

“You can’t get away from the fact that the vast majority of CI claims are for cancer, heart attack, MS and stroke, so as an industry we should perhaps be concentrating our efforts on improving what we offer for those conditions,” he says. “Adding mastectomy as a partial payment was a really good move and truly added value – but you run out of those examples.”

RGA UK’s James agrees, explaining that certain partial payments or new conditions can be added to a policy at no extra cost because the likelihood of someone claiming is so low.

“If the reinsurer makes no extra charge [to the insurer], you have to question what the value is to the consumer,” he says. “Providers are in a difficult position because if they add something to the policy that increases claims by 5%, their price will increase by 5% and they will drop off the price comparison for intermediaries.”

ROOM FOR IMPROVEMENT

And there is certainly still plenty of room for improvement, with many providers only paying out partial payments at the point of treatment rather than diagnosis. This means that for a condition such as low grade prostate cancer, where the recommended treatment in the first instance is a period of active surveillance, many will have a long wait for a pay out or may never receive one.

While Smart argues that people do not need a payout until they have undergone treatment which affects their ability to earn a living, Aldridge says it would be welcome to see more providers paying out at diagnosis.

“It gives the client more options at a difficult time,” he says.

In addition, partial payments have not yet started to filter through into claims statistics, so it is difficult to quantify their impact so far. PruProtect has not yet started publishing claims statistics for its serious illness cover, while Bright Grey and Scottish Provident, which introduced partial payments in May 2011, paid no partial payments last year. LV=, which first introduced partial payments in February 2011, also only paid full claims last year.

However, LV=’s Jones argues that even if the claims take a few years to come through, partial payments have immediate value in that they give consumers greater peace of mind.

It is certainly still early days for the partial payments movement, and how far the market will move towards an entirely severity based product remains to be seen.

“But whether insurers choose to directly compete with PruProtect or not, they will have to continue to adapt as more and more medical advancements are made, and illness that were once deemed critical become less serious,” says OVISO’s Fullaway.

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