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LOA tackles complexity of critical illness insurance

28 August 2008 Life Offices? Association (LOA)

Critical illness insurance products (also known as dread disease or severe illness products) are likely to become significantly less confusing once life insurers get the go ahead to implement a standard disclosure grid to indicate to policyholders when their critical illness products will pay out.

The disclosure grid, developed by the Life Offices’ Association (LOA), will indicate to policyholders what percentage of the insurance cover will be paid out for four different severity levels applied to the four major medical conditions which make up between 70% and 90% of all critical illness claims: heart attack, cancer, stroke, and coronary artery by-pass graft.

Speaking at the LOA Risk Insurance Forum held in Johannesburg today, Gerhard Joubert (pictured), CEO of the LOA, says once the best practice recommendation has been implemented by insurers, consumers will find it a whole lot easier to understand critical illness products and to compare the benefits offered by different life companies.

He says while the LOA would have liked to make the standard disclosure grid mandatory for all member life companies, there is a concern that the Competition Commission may regard this as anti-competitive behaviour.

“The LOA is of the view that standardised disclosure facilitates competition, as it enables consumers who do not have a technical understanding of medical conditions and definitions to make a meaningful comparison between the various products on offer and to select one that is appropriate to their needs.

“Nevertheless we have to hold back the implementation of the standardised disclosure grid until the LOA has had the opportunity to engage with stakeholders including the Financial Services Board, National Treasury and the Competition Commission.”

Removing complexities

Joubert says there has been a growing concern over the past few years from policyholders, intermediaries and the Long-Term Insurance Ombudsman that the critical illness insurance product had become increasingly difficult to understand.

“Unfortunately the nature of critical illness insurance products makes it impossible to simplify them completely as these products are designed to cater for various complex, uncertain and unpredictable events. But we acknowledge that the absence of standard industry disclosures and definitions further increases the complexity and uncertainty.”

Joubert says this realisation prompted the LOA to set up the Standardised Critical Illness Definitions Project (SCIDEP) Committee to formulate a set of standard industry disclosures, underpinned by standard medical definitions to which companies will have to refer when they make the required disclosures. The committee consisted of doctors, underwriters and actuaries from various insurance and reinsurance companies.

Standardising disclosure

According to Joubert there is an international precedent for standardised critical illness definitions – these have already been implemented in the UK, Singapore and Malaysia. Other countries like China and South Korea are also in the process of standardising definitions.

However, the LOA has followed an approach that will not force companies to use the same definitions or change any aspect of their products or the pricing thereof. Instead, they will have to disclose when their product will pay out, with reference to the industry standard disclosure grid, which is underpinned by standard medical definitions.

Joubert says critical illness products are designed to pay out a benefit when a policyholder has a serious illness or suffers a traumatic medical event which results in financial difficulty.

“Since the level of severity of the illness or trauma determines how much of the policy benefit is paid to the policyholder, the new definitions must be linked to four tiers of severity (A, B, C, and D), with A being the most severe and D being the least severe. For each tier the life insurer needs to disclose what percentage of the benefit will be payable.”

He adds that although the disclosures will be standardised, the percentage payout for each of the definitions is left entirely up to each insurance company.

Joubert says the new definitions do not have to be applied retrospectively and will only be applicable to critical illness polices sold after the implementation date, which still needs to be finalised.

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