Critical Illness Standardisation – The Australian Perspective
A previous issue of Risk Insights considered the impact of standardised definitions in Critical Illness (CI) insurance policies as sold in some Asian markets. It is a move largely aimed at helping make a complex product more transparent for consumers. Commonly worded levels of coverage should simplify sales and could help avoid the negative impressions caused when claims are disputed. On the other hand there is concern that common wordings across the industry could work to restrict competiveness and cause individual companies to respond more slowly to advances in medical diagnostics and treatment. This article continues the theme of standardisation in CI by exploring the opportunity and challenges in Australia and reflects on the experience of other markets that have taken this route.
Australian CI market
It is well documented that the first CI product was devised and sold in South Africa in 1983. The early policies covered only cancer, heart disease and stroke, allowing treatment choices for patients and providing financial support for their families. Similar products (called Trauma Insurance) slowly gained traction in the Australian market from 1991. Today the products on offer have expanded to cover multiple conditions in a bid to give an extensive range of cover to the customer. It is not uncommon for an Australian Trauma policy to protect against 40 or more diseases and medical events.
Around 85% of Trauma claims paid in Australia are for either cancer or heart disease. Some policies also offer partial payments, if the condition suffered does not meet the full definition required for a full claim payout. The definitions used in policies are not currently standardised; hence competition amongst providers in the Australian market is based on both premium level and policy definition wordings.
Insurers in this market have found the definitions used in their products to be under increasing media scrutiny. The Life Insurance Code of Practice that was recently introduced requires a review of medical definitions at least every three years and updating when necessary to ensure medical definitions stay current. The main objective is to improve transparency for customers and to reduce the tensions that can develop between a medical and insurance definition of disease.
As a result, many companies have opted to review the wordings to keep them medically relevant but also in a bid to make them more understandable for customers. Creating this balance is not easy; while a CI wording describes a medical event, it is designed to work in an insurance context rather than a clinical one. At the point of claim, the effectiveness of a definition may hinge on how the words used are interpreted not only by the insurer but by the claimant, their representatives (advisors and lawyers), and independent medical experts. It is therefore key that insurers define in clear and simple terms what is intended to be covered by their policies and what is not.
The media pressure has prompted debate about how products meet customers’ real needs and the ways to provide them with simpler coverage in a timely manner. Standardised minimum definitions are due to be introduced as part of the new Life Insurance Code of Practice. The proposed definitions are being developed and have been subject to consultation within the market and with medical experts. Consumers must have confidence that the product will work as expected and it is important they trust the integrity of insurers to assess claims fairly. Transparency in the whole process and consistency in product terms helps people to better understand their cover and this includes using consistent labelling and terminology.
One way to simplify complex products is to adopt common definitions across the board. There is a groundswell of opinion in support of requiring the minimum standards industrywide to comply with the definitions, leaving companies free to be more generous should they wish. A Gen Re opinion poll found 69% of senior risk professionals in favour of minimum standardised definitions and even of them becoming mandatory.
A move to standard definitions is not just window dressing; the serious underlying intention is to reduce the number of Trauma claims that are declined. The Financial Ombudsman Service (Australia) publishes annual statistics on complaints about disputed claims. In its 2015-2016 review, life insurance represented 4% of total complaints. Of the 1365 complaints about life insurance, 462 related to lump sum benefits and just 77 related to trauma.1
Globally, claims declinature rates have fallen continually over recent years. Gen Re’s Dread Disease Survey 2008-2012 revealed that declined claims made up just 9.8% of the total and while comparisons with other markets show that Australia performs well enough there is always room to improve (see Figure 1). Claims continue to be made due to misunderstanding of the product, a situation that serves no one well.
Australia moving toward standardisation
In 2016 the Australian Financial Services Council (FSC) issued a public consultation paper “Minimum Standard for Medical Definitions” to test the appeal of common wordings. It is hoped this will define the additional steps needed to build consumer confidence including education about the scope of cover and consistent labelling.
Initially the FSC will address the definitions for the most common causes of claim – cancer (excluding early stage cancers), severe heart attack and stroke resulting in permanent impairment. The over-arching objective is to introduce a minimum standard of cover that will apply to all insurers bound by the Life Insurance Code of Practice. Once agreed, the new definitions will apply to all new policies sold after 1 July 2017. This all comes with a commitment to more regular reviews to ensure that definitions reflect evolving medical standards and practice, which in turn will give increased peace of mind to policyholders and sales advisors.
It is expected that most life insurers will offer Trauma definitions that exceed the minimum standard definitions. And indeed many products already offer more generous wordings. Furthermore, the minimum standard does refer to CI policies with a 100% pay-out benefit, i.e. not for severity-based CI plans.
The CI market in South Africa
In South Africa tiered benefit products were developed with correspondingly complex wordings. Tiered products have defined levels of severity of a condition and only pay out a proportion of the sum assured when the condition meets that severity. If the condition worsens, then additional payments may be made. To bring some clarity, the Association of Savings and Investments of South Africa (ASISA) set up the Standardised Critical Illness Definitions Project (SCIDEP).2 The committee of doctors and actuaries formulated “severity levels” A to D for each of heart attack, cancer, stroke and coronary artery surgery.3 Since September 2009, ASISA member companies have been required to disclose to consumers via product literature and corporate websites, the minimum percentage of the amount covered that they will pay for each of the four severity levels. The disclosures allow consumers to make objective comparisons of the levels of payout to expect leaving them free to choose purely based on other factors including price. The effect is that insurers need not operate with identical wordings and may also provide cover for many severe conditions that are not covered by SCIDEP definitions.
It is difficult to determine if the standardised definitions have had an impact on sales volumes in South Africa. Some competition has taken place as to how much cover is available on the standard definitions. It is felt the regulator is expected to be more involved in future.
Another result is that customers experience less confusion, even though there are extra features that can be added to the minimum. Certainly the burden of advice on brokers and agents has decreased somewhat. One other positive outcome has been better engagement with the medical profession – not surprisingly as they played an integral role in the process of designing the definitions.
The number of declined claims in South Africa should also decrease, but this impact may take some time to materialise as the definitions do not apply to older products. From a pricing perspective and variation between companies, more commoditisation of products has developed and competition is focused on attaining 100% payout levels on the standardised definitions.
The CI market in the UK
After the launch of the CI product in 1986, UK insurers competed for market share with their own wordings of critical events. Ten years later it seemed the product had become almost too complex to sell.4 A campaign, led by an independent financial adviser, put the onus on insurers, and not advisers, to make the extent of coverage clear to customers. Consultations eventually led the Association of British Insurers (ABI) to publish standardised definitions in 1999 to be applied prospectively to new policies – and updated most recently in the 2014 ABI Statement of Best Practice for Critical Illness Cover.
Today, to be labelled “Critical Illness” in the UK, a product must cover cancer, heart attack and stroke, and comply with the ABI wordings as a minimum level of cover. This means the core of every product is identical, enabling consumers to choose on brand and price alone. The market is highly commoditised; while the core elements are the same, a wide variation in price remains. To attract customers, insurers can offer enhanced and additional conditions known as ABI+. As a result, they can continue to compete for the approval of rating houses while providing consumers with greater confidence and more transparency.
The involvement of the ABI and its collaborative approach – involving independent financial advisers, insurers, reinsurers, doctors and ombudsmen – helped to address the ever-changing science base upon which CI is built – and is probably the major reason it has proved an enduring success.
Standardisation in the UK was consumer-driven in part – creating a trust that insurers were not attempting to baffle consumers with arcane descriptions of rare and complex medical conditions – but more realistically, standardisation just made it easier for advisers to compare products, anchoring advisers’ confidence when providing advice. Similar to the experience in South Africa, another positive outcome has been better engagement with the medical profession. The product is intensely medical, and as a result medical experts and physicians have been engaged with the design of the standardised definitions.
No evidence shows that standardisation increased customer retention in the UK, but improved persistency may reflect policyholders’ feeling they have at least adequate protection. The totals of CI claims made increased as more policies were sold. The increase in claims paid is likely due to ABI guidance on non-disclosure (misrepresentation of material facts) and not an effect of standard definitions. This probably also accounts for the drop in complaints to the FOS.
The Australian CI market is focused on getting definitions in line with current medical standards and streamlining them where possible, spurred on by the experience of standardisation in South Africa and the UK. The specific measures vary from minimum levels of cover to strict product guidelines. Gen Re is actively involved in the consultation process of standardised definitions within the Australian Trauma market. We helped develop severity based products in many markets and will continue to bring our expertise to bear on the changes and innovations to come both for current and future products.
It is a challenge to make complex products that are easily communicated and updated. Standard definitions have been introduced in other markets in response to a variety of external pressures but ultimately they have been introduced by the industry itself based on its strong principles of “doing the right thing”. In the end, we should not lose sight of the great importance of paying valid CI claims when people most need support.