I want to share with you parts of a great article recently written by Alan Lakey (Director of CI Expert Limited) for Cover magazine. Written for advisers, I wanted to share many of the points that provide clients an insight into the factors that should be considered when making a recommendation, and why it’s not simply about cost!
At Finance North, we utilise Alan’s fantastic comparison and report writing facility – CI Expert – to assist in making the decisions and solutions we present to clients.
Every adviser has a view or a process regarding critical illness plan selection and it’s fair to say there’s not always a single right method of doing this. Advice is after all subjective.
Below is a list of the methodologies in use:
i. Using the cheapest provider.
ii. Selecting the provider with the highest number of conditions included.
iii. Counting ABI+ condition numbers.
iv. Using generic statistics
v. Choosing the insurer with the highest percentage of paid claims
vi. Opting for a well known brand
Some favour using the cheapest premium because they believe it validates their choice and they erroneously believe that it satisfies a compliance requirement.
They are able to point to the cheapest in a list of premiums and thereby justify their selection to the client.
Of course, price does not dictate the purchase of other products such as cars and houses and should not form the basis of advice.
Of course, selecting on premium is something that clients are easily able to do themselves online, but having the cheapest plan does not mean it’s the right plan.
Counting condition numbers
Many advisers use this simplistic yet flawed route as it offers a means of convincing clients that Plan A is superior to Plan B. Used in isolation, this creates the potential for a bad outcome and a possible future complaint.
Take a Scottish Provident Pegasus plan from October 2003. This plan pays out on diagnosis of low grade prostate cancer within the main cancer definition whereas all of today’s cancer definitions exclude diagnosis of tumours measured as Gleason 6 or less.
The Pegasus plan includes less than 30 conditions compared with todays upgraded Aviva plan, which offers 49 100% conditions and 36 additional payment conditions.
Yet how many men over 50 would be willing to gamble and lose the superior cancer coverage?
Similarly, many years back coronary angioplasty was a 100% payment condition whereas today the maximum payment is £25,000.
Furthermore, until 2007, a number of insurers paid out on diagnosis of a benign brain tumour whereas today only LV= does this. So simply counting conditions is flawed.
Counting ABI+ conditions is also fraught with problems. An insurer going beyond the ABI model wording sounds impressive but does it necessarily mean that it will result in more claims?
For benign brain tumour there are six definitions in use and five of them are ABI+ with the only one direct sales insurer using the ABI model wording.
However, the difference in wording amongst these ABI+ definitions represents a substantial difference in the likelihood of a claim.
Using generic statistics
Some years back that excellent reinsurer RGA issued sets of critical illness condition cards.
These provided information about the condition and also gave incidence figures using the x per 10,000 format. Some advisers, and indeed some comparison systems use the same approach.
Now as a generalisation this is useful but as a means of identifying the differences between competing contracts it falls some way short. Take heart attack as an example.
Knowing that there are 100,000 heart attacks each year means little unless you can assess how many were first time heart attacks, how many had previously undergone heart surgery and are probably unable to obtain cover, how many were male and what ages the heart attacks took place.
Add into this the impact of being a smoker and you can find that simple generalisations are just as likely to misinform.
Choosing the insurer with the highest claims percentage
This approach is thwarted by a number of intangibles. Newer entrants to the market will have an immature book of policies that are less likely to result in a claim.
Claims will also vary between providers depending upon the quality of wording, those for example with broader children’s cover will have higher payout levels for children.
Additionally, with claims definitions continually changing over the years, the period covered will influence whether a claim is likely to be paid.
The picture will change regularly, in any event, as Table 1 indicates.
Table 1 Highest Claims Paid Percentages
2016 – Aegon – 95.1%
2015 – Aegon – 96.7%
2014 – Old Mutual Wealth – 94.6%
2013 – Old Mutual Wealth – 96.0%
2012 – Old Mutual Wealth – 95.3%
2011 – Aviva – 94.1%
2010 – Aviva – 94.7%
2009 – Legal & General – 93.6%
2008 – Legal & General – 93.0%
2007 – Zurich – 88.0%
Choosing a well known brand
Others play the name awareness card, assuming that their clients will be comfortable with a well-known brand.
Let’s face it, this is a cop out. It implies that there are few differences between the various plans or that the adviser is unable to make a determination. Again, consumers can do this for themselves.
What is the solution?
The answer is to conduct an analysis. You don’t hear investment advisers recommending a company simply because it sponsors some sports event and you do not hear mortgage brokers recommending a lender simply because the potential borrower will have heard of it.
The ‘best’ plan for one client may not be the best for another. Consider the impact of age or gender.
Consider how the value of additional payment conditions gradually becomes diluted as the sum insured increases – £25,000 is 25% of a £100,000 policy but only 5% of a £500,000 policy.
Consider the added value of children’s cover, which represents an increasing percentage of total claims.
The analysis is complex and time consuming and for most advisers, however knowledgeable, the only viable solution is to use a system that calculates the value of every condition and provides guidance on which plan is most likely to result in a successful claim.
This is absolutely essential when reviewing existing plans.
Fortunately today there are tools available to assist advisers. Some advisers might have the knowledge to perform a manual analysis but why would they want to undertake this task if a powerful analysis tool is available.
This is why, at Finance North, we utilise the excellent services of CI Expert, combined with 30 years industry experience, and a personal experience of claims under critical illness, terminal illness, and death.