Why tinkering with critical illness reveals fundamental problems in product design

The Association of British Insurers and its working party, the group handling the statement of best practice for critical illness cover, wants financial advisers to help it find a new name for total permanent disability (TPD). It wants to know what the T, P and D should stand for.

In November the ABI said it wants to rebrand and standardise TPD due to the confusion around the phrase, but added further consultation was needed on the issue.

The problem with asking financial advisors is that the ABI tends to get more than it bargained for. Overall, the lack of interest in discussing it is not surprising as most are fed up with committees of insurers tinkering with critical illness definitions rather than allowing each provider to innovate. Those that have expressed an opinion suggest that changing the name misses the real problem that it has poor claims rates. One suggestion is to drop the word total. The argument being that a broken leg can be totally broken, but a claim won’t be paid just for that, as you are not totally disabled. Another view is that permanent disability in itself is meaningless as being permanently unable to follow your own occupation is not necessarily the same as been totally and permanently disabled. And you can be permanently disabled and have a claim rejected because your disability is not extensive enough to meet the existing requirements.

One suggestion is that there should be two definitions - Permanently disabled from following your own occupation and permanently disabled from meeting the requirements of a task/activity based definition. And that the words 'suited' and 'any' in front of occupation are pointless and too subjective.

By now, you have probably wandered off to do something more important like cleaning out the budgie or clipping your toenails. The crux of the matter is that while insurer and advisors spend weeks in tedious discussion, 99.9 % of you neither know nor care about total permanent disability definitions.

Part of the problem on permanent total disability is when you understand that the insurance industry is not a whole, but more a federation of warring tribes. Critical illness is a long-term policy underwritten by life insurers. Personal accident insurance is short-term cover underwritten by general insurers – the two rarely work together or even talk to each other.

Personal accident and illness insurance is short-term cover paying out small weekly amounts when you have a short-term injury such as breaking a leg. But it also includes large cash payments for when you die or have a permanent total disability.

So the logical idea of taking PTD out of critical illness cover and adding a personal accident and illness policy to a critical illness one, or better still offering it as an optional extra, falls down due to the warring tribes of life and general who each jealously guard their territory.

Sadly it all goes back to a much bigger problem. Insurer A sells you a life policy, insurer B sells you an income protection one, insurer C sells you a personal accident policy, insurer D sells you a critical illness policy and so on. Even where one insurer offers all of these in one combined policy, it is normally just sticking individual policies together with different rules on age acceptance, length of policy period and much more.

When you buy a car, you don’t get Mini wheels with a BMW, a sat nav that you have to stick on the back seat and a self-assembly kit for the engine. If life insurers made cars that is what they would offer – and only in a set limited format.

Why not provide products that fit customer needs, rather than forcing customers into boxes. Treating Customers Fairly just becomes a joke if the basic product is not fit for service. 

Last time I checked, twenty car makers from different companies did not sit round a table trying to design a car that was so average it suited nobody; so why do we allow insurers to do this with critical illness? 

Critical illness insurance hot topic: 3 March 2010