Setting appropriate life insurance standards

Amid the heated debate about standard definitions for general insurance, Tim Browne asks whether the same approach should be used in the life insurance arena.

Since Christmas, Australia has experienced a number of natural disasters such as floods and cyclones.

Unfortunately, not all of the people affected had appropriate cover in place, sparking widespread calls for a review of general insurance policies to address the need for greater understanding from consumers.

The Government has noted that different insurers take different approaches to coverage, and that recent events highlight a lack of consumer understanding about what their insurance policy covers.

In response, the Government has proposed a single, standard definition of flood cover across the insurance industry. Assistant Treasurer and Minister for Financial Services Bill Shorten recently announced:

“In future, if the term ‘flood’ is standardised across insurance policies and defined in plain English terms, they will be more easily understood upfront, so consumers aren’t surprised when they try to make a claim. These changes will help make sure this kind of unnecessary confusion and heartache about insurance policies doesn’t occur following the next natural disaster.”

A one-page, key facts statement will also be included in policies to allow consumers to see, at a glance, the key elements they are covered for.

The result of this review will undoubtedly provide confidence for consumers as to the level and type of cover they have in place.

Following this development for the general insurance market it would be quite understandable that the same questions may be asked of life insurance.

That is, should we have standard definitions for income protection, trauma and total and permanent disability products?

Over recent years there has been a proliferation of definitions in these types of cover with innovation and competition bringing more than 60 different definitions for trauma products alone.

In fact, every life insurer in Australia has its own unique trauma insurance definition.

However, it could be asked whether this complexity is necessary when you consider that more than 80 per cent of all claims concern four critical illness (trauma) conditions – heart attack, stroke, cancer, and bypass surgery.

The situation was similar in the UK until 1992 when insurers sought to simplify matters by defining the 12 most common conditions.

Since then, the sale of trauma insurance policies has increased significantly year-on-year, and now more than nine million adults in the UK (one in four) have trauma cover.

Today the UK has 37 standard trauma definitions that are consistent across all life insurance providers.

We should view Australia in this context where just one in every 26 working-age people has trauma cover. Of our 22 million population, there are less than 600,000 trauma policies in force.

The underinsurance issue in Australia is such that we rank as one of the most underinsured nations in the developed world, and parents with dependants are underinsured by $1.37 trillion, according to research from the Financial Services Council.

Standardising definitions in Australia is becoming a hot topic, and a popular issue for many.

Riskinfo conducted an adviser poll in March 2010, where they asked: ‘Do you support the concept of standardising key definitions in trauma insurance products?’ More than 63 per cent of respondents wanted standardised definitions.

CommInsure, in collaboration with Beaton Research and Consulting, surveyed more than 500 advisers this month, with a similar amount, 56.1 per cent, stating that product definitions as a whole should be standardised.

We need to ask ourselves if implementing clear and concise minimum benefits through standard definitions, consistent with general insurance, would improve the understanding and confidence of consumers for life insurance.

There are certainly numerous potential advantages of standardising trauma definitions within Australia.

Clients receive certainty at claim time that, regardless of what company they chose to purchase their trauma insurance policy from, they know the minimum definition they need to meet in order to be eligible to receive a claim payment.

If the standardised definitions are readily communicated to the public, then we can hope for greater understanding of the need for trauma insurance, and thereby increased uptake of policies across the board.

Ultimately, this will help reduce underinsurance.

The distribution footprint for life insurance in Australia is such that, of the approximate 18,000 financial advisers in operation nationally, just 3,000 actively provide life insurance solutions to their clients.

Simplifying the industry’s offering to consumers through standard definitions might also encourage planners who normally shy away from advising on trauma insurance, and perhaps life cover in general, to discuss these products with clients.

While standardising trauma definitions has worked extremely well in the UK, we need to carefully examine if this is appropriate for Australia and importantly, if it would benefit all parties by ultimately generating greater clarity and confidence for consumers.

In order to consider the issue of standardising trauma definitions we can look to the UK example where an effective consultation process to determine standardised trauma definitions has taken place.

Various stakeholders are involved, with a full public consultation process, including regulators, charities, consumer groups, insurers, medical professionals, and the media.

One of the common concerns that has been raised is that standard definitions could stifle innovation. Issues such as this must also be addressed.

To counter this view – again looking to the UK example – the industry upgrades its trauma definitions every three years. The Australian market would again need to consider its own appropriate review cycle, particularly to keep pace with medical advancements.

The overarching principle should be greater transparency, understanding and accessibility for the consumer. If standardising product definitions, particularly for trauma (critical illness) policies, achieves these principles then we have a duty to take action and look to its benefits in the future.

Tim Browne is the general manager of retail advice at CommInsure.