Karin Lloyd
Strategic and Technical Claims Consultant
London, UK
Reprinted with permission by Karin Lloyd
What do a young woman in Hong Kong, an American wrestling with medical expenses not covered under health insurance, a middle-aged South African man and a couple buying their first house in the UK have in common?
Sorry to disappoint but this is not the start of a naughty joke – in fact, they are all the target market of insurance cover generically known as Critical Illness.
The precise products aimed at each group may vary enormously and Critical Illness is highly sensitive to the context in which it is being sold, but all of the products in this range share some common issues that anyone selling and managing CI products needs to be aware of. Three of these issues are discussed below, with a look at how they are dealt with in various markets.
Medical advances
How can a long term product, which by it’s very nature needs to be extremely specific about what is and what is not covered, keep up with the ever more rapid developments in the medical world?
By way of illustration, here’s what a typical heart attack definition said a couple of years ago:
‘The death of a portion of the heart muscle as a result of inadequate blood supply as evidenced by an episode of typical chest pain, new electrocardiograph changes and by the elevation of cardiac enzymes. The evidence must be consistent with the diagnosis of heart attack.’
Here’s how a typical heart attack is now diagnosed:
- Medical history, including relevant risk factors for coronary atherosclerosis
- Physical examination
- Electrocardiogram
- Blood tests
The blood tests include CK-MB and Troponins, specifically Troponin T (cTnT) and troponin I (cTnI). Source: American Heart Association
With the old definition, issues arose if cardiac enzymes had not been recorded or if they had gone back to normal by the time the test was done. Now, Troponins have entered the equation bringing different issues. On the claims side, Troponins can be raised for other reasons besides myocardial infarction and on the pricing side, more people are likely to qualify for benefits than was originally envisaged in pricing assumptions.
UK insurance companies handle this kind of issue at an industry level, through a dedicated Protection Committee covering all protection products. It meets regularly and includes representatives from insurers, reinsurers, the main industry body and regulators. It is also a multi-disciplinary committee so that those involved in pricing, product wordings, marketing, underwriting and claims are represented, along with medical and legal advice. There are additional actuarial initiatives to model the effects of anticipated changes in medical practice that inform the Committee’s deliberations.
The Committee oversees the production and publication of a Statement of Best Practice for Critical Illness Insurance that contains, among other things, minimum standard wordings for the major definitions within typical contracts in the UK. This was how the UK standard definition for heart attack came to include reference to Troponins and now specifically excludes other acute coronary syndromes. You can view the latest recommended wordings by following the links in the Information Zone at www.abi.org.uk.
The biggest factor influencing this industry-wide approach was a move towards the standardisation of policy definitions a number of years ago. This was originally driven by sales considerations so that independent financial advisers and consumers could more easily compare products between different insurers, but it has had far-reaching consequences beyond this.
One of the major unintended benefits to the industry has been the pooling of expert resources to allow the industry, as a whole, to respond to emerging medical issues and attempt to ensure that all the products on sale are up to date.
If each company had to individually find the resources to track medical advances and formulate a response across all disciplines, I suspect that the industry would now be a confusing mess that professionals within it would struggle to understand, let alone consumers. This point is not lost on the regulators who are also in a much better position to maintain effective supervision in collaboration with the industry rather than in combat.
One of the effects of medical advances since Critical Illness products first came on the scene is that some illnesses are being detected earlier, at stages that can now be more easily treated and managed. Whilst still critical if these illnesses progress, the financial need at the time of diagnosis is much reduced and a product that pays ‘all or nothing’ is seen as less and less relevant.
In South Africa, the market response to this issue has been led by an innovative development from Discovery Life (www.discovery.co.za) who came up with the concept of staged benefits. For example, many standard CI contracts would cover total blindness but pay nothing for partial blindness. Staged benefit cover would provide a percentage of the full benefit based on the category it was allocated to. There are usually around 6 categories ranging from 10% to 100% and various points in between.
Whilst this adds a degree of complexity to the product and its management, it does address the issue of more closely matching customer needs at the time of diagnosis.
Inclusivity
‘I nearly died, how critical does my illness have to be?!’ This is the cry from at least one claimant who has made the UK national media after suffering a serious illness that was not on the list of the cover they had bought.
I’ve seen this situation personally in the early days of CI in the UK, when a more limited range of illnesses were covered than is now usually the case. Faced with a terminally ill claimant with a benign brain tumour that wasn’t covered, I should technically have declined the claim and lain awake at night trying to wrestle with my conscience. Instead, I went to see our chief actuary, who shared my unease, and we delved into the pricing. Following some statistical research, he decided that if we were to add benign brain tumour as a covered condition, it could be absorbed into the existing pricing without any additional cost. We constructed a definition with medical help and added it to all new contracts. And with the full support of senior management, we did what claims managers in general should never do; we paid the lady’s claim on an extra-contractual basis.
Since those days, UK products have seen an enormous expansion in the number of conditions covered, some with little forethought as to what would happen should a new screening test be developed. Having gone down this route, most UK companies would not now recommend this as an ideal way to deal with the issue of inclusivity. The products are seen as too complex leading to delays in underwriting and excessive administration.
However, it’s not just a numbers game. Most of the complaints now relate to stages of illness that are excluded within a definition. A product with fewer definitions but more clarity about what will and won’t be paid for may actually be a better buy. Staged benefit products help to alleviate this kind of problem by paying a percentage of the benefit for lesser stages of illness that might be excluded in conventional products.
Many Asian companies have found a different way to overcome this problem by targeting different forms of CI at very specific markets. A product title like Lady Cover makes it very clear that the list of critical illnesses included is not infinite and is targeted at illnesses common to a specific group of people.
One of the most widely reported issues in the UK at the moment is the percentage of claims that are declined, around 20-25% as an industry average (Source: Financial Services Authority), with half of them being declined because the definition has not been met. Clearly there is a mismatch between what customers think they are buying and what they are actually buying.
Again, the industry response to this has been to channel an initiative through the Protection Committee. Among the changes they have made is to expand many of the definition titles to make it more explicit that not all forms of the condition are covered. For example, ‘Cancer’ is now ‘Cancer – excluding less advanced cases’; ‘Heart attack’ is now ‘Heart attack – of specified severity’ and ‘Stroke’ is now ‘Stroke - resulting in permanent symptoms’.
It is also absolutely essential to ensure that claims people, or as I sometimes like to call them, the operators of products, get involved in product development, claims scenario testing and reviewing marketing and sales literature to ensure that what is promised can actually be delivered.
Non-disclosure
Critical illness is a product with an inherently high potential for non-disclosure for all sorts of reasons. Partly it’s to do with the structure of the policy, which pays a lump sum with no restrictions on it’s use, and which has been described by some as a ‘windfall payment’ since the concept first appeared.
Then there’s the complicated application process with questions that need to cover all the risk factors for all of the conditions in the policy. It’s not surprising if disclosures are less than full by the time you get to the fifth risk factor on the thirteenth covered condition.
In the UK, half of the claims that are declined are declined for non-disclosure and the publishing of this fact has led to efforts to improve application forms, application warnings, advisor education and underwriting practices, to try to get the declinature percentage down.
The good news for the North American market is that it already has many of the features that are helping to improve underwriting in the UK, notably teleinterviewing and the use of more extensive medical screening.
In countries with contestability clauses, like Hong Kong and Singapore, this inherent non-disclosure must be covered in the pricing as well as by good upfront underwriting practices. Claims staff can try to investigate and deal with non-disclosure when they find it but in practice, they can only decline in the event of proven fraud and this hardly ever happens.
Critical illness is a product with many variations and it is much harder to manage than was envisaged when it was introduced into markets outside of its original context in South Africa. But by taking the time to understand the issues surrounding CI in whatever context it is being sold, a number of markets are proving that it can be managed. No doubt there is still a way to climb on the learning curve but we can all continue to benefit from experience wherever it is gained.
ABOUT THE AUTHOR
Karin Lloyd has recently set up her own consultancy practice following 24 years in Underwriting and Claims in the direct market and as a reinsurer. Since branching out on her own, Karin has become involved in significant new developments in the UK market, including the Income Protection Task Force and the use of tele-interviewing skills in the Claims field.
After starting her career as an Underwriter, Karin set up and managed Swiss Re UK's first dedicated Claims department and was a senior member of the Global Underwriting and Claims team, contributing to the development of Lifeguide and a number of innovative web-based tools to support Underwriters and Claims assessors worldwide. Her global responsibilities extended to close collaboration with colleagues in Product development, Pricing, Marketing, Experience analysis and Risk management. She has worked with Underwriting and Claims managers in many parts of the world, including a tour of leading US companies gathering best practice information, and a three-month secondment to a reserve reduction project in Australia.
She is looking forward to continuing to work with professionals both within and outside of the UK starting with a visit to Australia in December.
Contact: karin@karinlloyd.com
Website: www.karinlloyd.com
