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Critical Illness Insurance – regulation?

March 9, 2015

The “regulation” of Critical Illness Insurance by the ABI has been an interesting journey. It originates in a report over 10 years ago by the competition authority at the time – the OFT.

Before this report, competition had driven what started as a pretty simple product into mind-blowing complexity where you needed to be a consultant oncologist to decide which policy to buy if you were concerned about getting cancer but that would not help if you were also concerned about a heart attack. Normally competition is a good thing as it reduces prices and increase consumer choice but for consumer choice to work you need to be able to compare products. The OFT found that competition had increased the potential for choice but no reasonably informed consumer could make a choice because of the complexity of the products of different insurers. Hence the ABI had to introduce its Statement of Best Practice (SoBP). The effect of this was to give peace of mind to consumers because whatever policy they bought would have the same definitions. The market grew rapidly. Then in came lots of disputes on non-disclosure – another story. The Financial Ombudsman Service was heavily involved in the non-disclosure problem but was not a driving force on the issue of definitions. The ABI seemed to have fixed it after the OFT report.

Hindsight is a wonderful thing but maybe the rot set in with the reviews of definitions. These were well intentioned – to stop massive price increases. Medical advances meant that many of the conditions were being diagnosed for a lot of people earlier and such diagnoses would not indicate a large increased level of risk of serious illness. Prostate cancer is a good example – it can either be pretty serious or you are more likely to die of something else. The definition was tightened but some companies chose to offer the original one. In addition to this more and more conditions were added as add ons to the ABI set list.

Then another beast entered the jungle – payouts based on severity. Personally, I think it is arguable that these never fitted the ABI concept and should have been given another name. But that said, even if they had, a new SoBP would have been required for them or we would have been back at square one in a new niche market.

So where have we ended up? The SoBP worked for a long time but seems to have gradually let the spectre of innovation without real consumer choice arise again. The long running Lloyds dispute that was in the news last month is a good case in point. It is not for me to argue the rights and wrongs of the individual case. Although it is very pertinent that the dispute arose because of advice to change an existing policy to one with new updated wordings. What struck me was the statement that the definition of critical illness was extremely complex and that it would not be possible for its advisers to have set out the differences in depth.

So that’s OK then? Not really. I think consumers and their advisers need to think very carefully before changing policies. The trend on defining conditions has always been to tighten them. In addition there is a real possibility that the situation has drifted to such an extent that the OFT’s successor the CMA might just want to revisit perverse competition between Critical Illness insurers again. Innovation is not always good. I prefer my Easy Jet pilot to avoid it….

Written by Richard Walsh. First published in Cover Magazine

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