With input from CEOs, actuaries, underwriters, claims assessors and business development executives, PartnerRe examines how satisfied the industry is with the ABI review process and whether the recent review has overcome known issues with Total Permanent Disability cover.
A recent survey by PartnerRe of leading practitioners in the U.K. critical illness market has revealed concern that there may be a divergence between where they think the sector should go and where it will likely end up in the next five years. The industry association’s Association of British Insurers (ABI) review process is seen to have significant advantages, but there is a general fear that it may be hampering innovation in the sector. Reaction to the most recent review, on Total Permanent Disability, left most respondents less than satisfied, with the result being not a consensus view but the “least worst option.”
Focusing on the likely direction of the critical illness product in the next five years and how this may differ to the direction the product ideally should take, PartnerRe’s survey asked about the pros and cons of the ABI’s Statement of Best Practice review process, in particular the effectiveness of the recent Total Permanent Disability (TPD) review, and the impact of the recent European gender directive ruling.
The survey, conducted in March 2011, gathered the views of 46 respondents comprising a cross-section of actuaries (just over half), business development executives, medical underwriters, claims assessors/managers and CEOs. The vast majority of participants were seasoned professionals with 10 or more years in the sector.
Expected vs. preferred product changes
Respondents were asked what they consider is the expected as compared to their preferred change to the critical illness product over the next five years (figure 1). Almost a quarter expected to see more and more diseases covered but interestingly this change is not desired by any respondent. It is also evident that the preferred change is to move towards a hybrid product with Income Protection (IP) but this is at odds with what people expect to happen.
“People expect to see more diseases covered because it’s an easy way for insurance companies to differentiate their products – no innovation is required,” explains PartnerRe’s Dr. Christopher Reynolds, Mortality Actuary for U.K. and Ireland.
“It’s a ‘conditions race’. Most of the diseases covered are very rare and therefore there is little additional risk involved, but the company appears to be offering broader cover to the consumer. At the same time, there is recognition in the market that what customers actually need is income protection (IP) as opposed to lump sum payments. The reason people don’t expect to see more IP products on the market anytime soon is that they are more expensive. To launch such a product will take money and time and the industry has other things to deal with right now such as Solvency II and the gender directive. It would take a brave provider to break away from the pack. IP will grow over time, but not as much in the next five years as industry professionals would like to see.”
Pros and cons of the ABI review process
The ABI is the trade association for insurance companies in the U.K. It represents over 400 insurance companies which provide 96% of the insurance business in the U.K. The first Statement of Best Practice (SoBP) for critical illness cover was published by the ABI in 1999. Its aim is to protect consumers and help them understand and compare critical illness policies by ensuring a common format for the way cover is described at the point of purchase, the use of common generic terms and the use of model wordings for critical illnesses and exclusions which meet appropriate minimum standards.
The survey found that an increase in customer and broker understanding of the critical illness product is definitely perceived to be the main benefit of the ABI SoBP review process (figure 2). Respondents commented: “I really do see major improvements”, “The advantages far outweigh any disadvantages” and “Without standardization there would be much greater broker and customer confusion on an already confusing product.”
The main disadvantage (figure 3) is perceived to be that it prevents innovation of the critical illness product in general, particularly the introduction of severity based products (where payments would be proportional to the severity of the condition). Some notable comments included: “Frankly it creates as many problems as it solves”, “It discourages innovation and takes the industry in the wrong direction” and “My main concern is that it locks in the product to a bit of a straightjacket.”
Total permanent disability review
In 2009, the ABI research on Total Permanent Disability (TPD) claims found that although TPD accounts for only 3% of critical illness claims, 55% of these are declined. One reason was thought to be the lack of clarity around what constituted TPD as no model definition existed. TPD was also found to account for 35% of complaints to the Financial Ombudsman Service about what is covered under critical illness. As a result the ABI took the opportunity to address this issue in their most recent review.
The new SoBP introduces five model definitions for TPD, but no name change. The model definitions are intended to improve clarity about what is/is not covered and to help consumers compare policies.
In contrast to the relatively positive reception of previous SoBP reviews, the majority of respondents were less than satisfied with the TPD review (figure 4). There was a general feeling that no consensus emerged from the process and the final result was perceived as “the least worst option” as opposed to the move forward that the industry had hoped for at the start of the process.
Asked what would have been an ideal outcome of the review, half of respondents wanted a change to name/definition, but there was no consistent view on what the change should be. Some wanted TPD to become a standalone product while others wanted recognition that TPD does not provide genuine cover against disability and that more people need income protection.
With this variety of ideal outcomes, it is reasonably clear why the ABI was not able to achieve a consensus view from the industry,” comments Donal O’Leary, Life Client Partner U.K. and Ireland at PartnerRe.“Part of the problem was that there were diametrically opposed views from the start. It took far longer than most reviews – two years as opposed to six months.”
EU Gender Directive
Since 21 December 2007 unisex rates for insurance have been required throughout the European Union, but many member states took advantage of an opt-out clause which allowed for differences in premiums or benefits based on gender when “based on relevant and accurate actuarial and statistical data”. However, an action brought by Test-Achats in the Belgian courts and referred to the European Court of Justice (ECJ) has resulted in a ruling that this opt-out is invalid with effect from 21 December 2012. All new policies from that date must use unisex pricing.
Despite the strong sentiment that the new Gender Directive is not helpful to the U.K. market, the good news is that the sector is relatively sanguine on the impact of this ruling (figure 5).
Mis-estimation of the aggregate mix between male and female policies was seen as the biggest risk involved in implementing the ruling.
“Surprisingly, no respondents considered compliance costs, lack of resources or the extension of the ban to marketing as a major risk. There exists a general uneasiness that this could be the start of a slippery slope which will eventually lead to the removal of all risk-based pricing, which would completely transform the structure of the U.K. market from where we are today,” says Dean Graham, Head of Life at PartnerRe.
It is encouraging that, the TPD review aside, respondents are generally positive about the ABI’s role in the development of the U.K. critical illness product. They recognize that the SoBP aids customer understanding but are concerned about the way it inhibits product innovation. Respondents are also relatively sanguine on the implications of the ECJ Gender Directive ruling and confident about their ability to handle this change. However it is troubling that there is such a wide apparent gap between respondents’ views on expected changes and their preferred changes to the U.K. critical illness product over the next five years.
“If actuaries, CEOs, claims personnel and underwriters all agree that the industry should be moving in a certain direction, but it is not, what is really driving the change? Is it consumer demands? Is it inertia?” asks John O’Neill, Head of Life, U.K. and Ireland at PartnerRe.
“This is a wake-up call to the industry to make sure we don’t just take the course of least resistance. The industry is largely in control of its own destiny and if there is a mis-match between desires and expectations then it needs to ask itself some hard questions.”