Moratorium underwriting is said to keep PMI affordable for more consumers, but it is best sold with specialist advice, argues Emily Perryman
Moratorium underwriting continues to be a hotly debated topic among private medical insurers and intermediaries. Advocates of the practice argue that its simplicity attracts customers, while critics believe it leaves policyholders in the dark.
The Office of Fair Trading’s (OFT) investigation into the practice is well behind us and insurers have made significant steps towards making their literature clear and ensuring consumers understand what moratorium underwriting means. But some are yet to be convinced that it is beneficial for consumers.
Charlie MacEwan, head of communications at the insurer WPA, says: “Moratorium underwriting is bad for the insurance industry because consumers don’t know what they are getting or what they are covered for until they claim. Salesmen say that they explain the policies, but the consumer doesn’t get a certificate. With full medical underwriting the customer gets a certificate which explains what they are and are not covered for, so there is clarity.”
Exeter Friendly Society also has reservations about moratorium underwriting and it has therefore decided to exclude the option when it launches a new private medical insurance (PMI) plan later this year.
Nick Jones, brand and marketing manager at Exeter Friendly Society, says: “We weighed up moratorium underwriting very carefully and we found that the disadvantages outweighed the advantages. At the moment, if the customer doesn’t seek treatment for a pre-existing condition for two years the condition is covered. But we want to provide clarity upfront and we don’t want to discourage people from seeking medical treatment. The aim of our new policy is clarity, transparency and simplicity.”
Some brokers agree that consumers sometimes do not understand what moratorium underwriting entails. Michael Payne, director of personal healthcare at ADVO Group, says clients who have done background research before coming to the firm for advice can be confused by the information they have received from insurers.
“The client may think they will be covered for pre-existing conditions after two years, but they forget that this only applies if they don’t go for treatment,” says Payne. “Others think the moratorium applies to conditions existing in the last two years, rather than the last five years.”
Despite this, the majority of insurers do offer customers the choice of moratorium underwriting alongside full medical underwriting. Even BCWA, which traditionally steered clear of moratorium underwriting due to the bad press the clause received in general, decided to introduce it in 2005. Howard Hughes, BCWA’s head of marketing, says the decision was largely based on demand from PMI brokers.
“It hasn’t caused any problems for us or for our customers,” says Hughes. “Moratorium underwriting in the wrong hands can lead to mis-selling, but we are a more disciplined industry than we used to be.”
One of the main benefits of moratorium underwriting for the insurer, intermediary and consumer is its convenience. The consumer does not have to fill in a lengthy application form about their medical history – they will only be underwritten at the point of claim and medical conditions will not be excluded upfront.
ADVO Group’s Payne explains: “If a client had a major operation three or four years ago this would probably be excluded under full medical underwriting and the client would have to plead their case. Under moratorium underwriting the exclusion will automatically be lifted after two years if the client doesn’t make a claim. If the condition existed more than five years ago, the client would still have to disclose it under full medical underwriting, but it could fall out of moratorium underwriting altogether.”
Some believe that moratorium underwriting is particularly useful for attracting younger people and those who like to buy PMI online. Nick Homer, marketing propositions manager at Norwich Union Healthcare, says the internet is growing as a tool to transact PMI business on and it is easier to do it through the moratorium underwriting route.
“Moratorium underwriting is particularly useful if insurers want to attract younger people because it supports them more,” he adds. “People don’t want to fill in a lengthy application form if they are in good health.”
Insurers believe they provide enough information to ensure consumers understand what they are covered for, but suggest it is better if the consumer buys through a specialist intermediary. Intermediaries will be able to give clients a personalised recommendation on whether moratorium or full medical underwriting is the better route, based on their medical history.
Fiona Harris, head of personal markets at Bupa, says: “It is really important that consumers understand what they are buying. Under the OFT guidance we have to offer both forms of underwriting anyway, and in offering this choice it should become clearer what the difference between the two is. We have information showing the difference, but it is also why an intermediated sale works. The intermediary has plenty of time to explain moratorium underwriting and explore whether it is appropriate – for example whether the client has a pre-existing condition which they won’t need to get treatment for in the next two years.”
One insurer that believes it has removed the problem of complexity is PruHealth. Rather than offering customers a rolling moratorium – where a claim on a pre-existing condition will cause the clock to be re-set for another two years – PruHealth offers a flat moratorium. This means that after two years pre-existing conditions will be covered regardless of any treatment received.
Tal Gilbert, head of research and development at PruHealth, says: “We felt that traditional moratorium underwriting, where every time someone claims the clock is re-set, was confusing for consumers and unfair. When we spoke to consumers and advisers they saw a flat moratorium as a sensible and attractive option.”
Glen Smith, director of Essex-based intermediary Health Care Partners, says PruHealth’s flat moratorium is similar to medical history disregarded, which he believes is a great advantage for consumers.
“We can use the PruHealth model to sell PMI to people with previous medical conditions,” he says. “The problem with the rolling moratorium is that people are trying to beat the clock. People shouldn’t be discouraged from seeking medical help and PruHealth avoids this.”
ADVO Group’s Payne says a flat moratorium is useful for consumers who need to take regular medication for a condition for the rest of their life, such as diabetes. Under full medical underwriting, treatment for diabetes would usually be excluded upfront and under a rolling moratorium the clock would keep resetting. Under PruHealth’s model, however, while routine monitoring of the condition will not be covered after two years, acute treatment will.
Some brokers and insurers have raised concerns that a flat moratorium carries the risk of anti-selection, with consumers waiting until the moratorium has ended before claiming and causing an excessive number of claims.
Norwich Union Healthcare’s Homer says: “PruHealth’s flat moratorium model is likely to increase claims costs and these costs ultimately get fed back to customers. We’re comfortable with the approach we’re taking and it is important we manage ongoing costs. PruHealth’s approach is a generous one and time will tell whether it is a reasonable one. Insurers need to be mindful of anti-selection, where consumers take out cover they couldn’t otherwise get. This is ultimately to the detriment of customers.”
However, PruHealth’s Gilbert does not think anti-selection is an issue, particularly given the existence of its Vitality proposition.
“We chose the two year period very carefully. We felt it provided sufficient protection from a risk management point of view, and our experience has been excellent. The combination of our Vitality proposition and traditional risk management techniques has meant our business is very sustainable.”
While a flat moratorium might be easier to understand, it does not get around the problem of customers being underwritten at the point of claim. Once again, it seems that advice from a specialist intermediary is essential for consumers to understand what they are and are not covered for.
When PMI is offered on a moratorium basis the insurer will not ask the customer for details of their medical history. In return, the customer will not be covered for any medical conditions that existed in the five years before taking out the policy. However, if the customer does not have any symptoms, treatment, medication or advice from their GP for the condition for two continuous years after the start of the policy, it will be covered.
A rolling moratorium, offered by the majority of insurers, means that if the customer seeks medical treatment for a pre-existing condition during the two year moratorium period the clock will be re-set for another two years. A flat moratorium, offered by PruHealth, means that pre-existing conditions will be covered after two years regardless of any treatment received.
FULL MEDICAL UNDERWRITING
When PMI is offered on a full medical declaration basis the customer will be asked a number of questions about their medical history. The insurer will review the responses and decide on what basis it can accept the customer for cover. If the customer has any pre-existing conditions they will usually be excluded from cover, along with any conditions related to them. The exclusions will be written on a policy certificate issued to the customer.
MORATORIUM MADE EASY
The Association of British Insurers (ABI) published an excellent consumer guide to PMI in April of this year. It is designed to help consumers understand more about what PMI is and how it works. You can use the guide to help potential clients who are new to PMI learn more about the implications of full medical and moratorium underwriting. Electronic copies of the guide can be accessed free of charge at the ABI’s website. Visit www.abi.org.uk and click on the “Information Zone” and then “For Consumers” buttons on the left hand side of the screen of the homepage. Alternatively, visit www.abi.org.uk and type “PMI guide” in the search box.