Consumers still confused by critical illness cover, finds FSA

Critical illness insurance pays out a lump sum if the insured is diagnosed with, or dies of, one of a specified list of serious illnesses.

Not all illnesses are included. Typically, only certain types and stages of cancer are covered and, in the case of a heart attack, insurers will want medical evidence of the severity of the attack before paying a claim.

But an independent study commissioned by the FSA has shown that 68% of policyholders surveyed wrongly assumed they would be able to claim for any illness that meant they could not work, suggesting the limits of the cover had not been adequately explained to them during the sales process.

In addition, many consumers failed to appreciate the importance of disclosing material facts, both when buying the policy and when their circumstances changed.

In several cases, key information, such as the insured's smoking behaviour or a family history of cancer, was not disclosed when the cover was taken out, potentially invalidating any subsequent claim. Over half (55%) of policyholders believed they only needed to provide more information if and when they made a claim.

Publishing the findings on 16th April, the FSA stated:

"There is a clear gap between consumers' perceived understanding of [critical illness cover] and actual understanding of the product…These misunderstandings cross all types of consumer in terms of financial sophistication and the type of product they have purchased.

"The consistency of the findings supports our view that there are problems in the way information is disclosed to consumers at the point of sale, which persist and need to be addressed by firms."

New rules

The research is the first stage of testing whether new requirements in the Insurance Conduct of Business Sourcebook (ICOBS) are having any effect.

In 2006, a mystery shopping exercise showed that purchasers of protection products (such as term insurance, critical illness and income protection cover) relied more heavily on oral disclosures than on written documents and that, in many cases, the information provided to the consumer was inadequate.

As a result, new rules were introduced in January 2008 which required firms to provide information orally on all (not just some) of the policy's main characteristics and to ensure that the information given is sufficient to enable the consumer to make an informed decision, without overloading them or obscuring other parts of the information.

Firms had until July 2008 to implement the new rules. The FSA now wants to monitor whether they are having any effect on the way critical illness cover is being sold. 

The answer is not yet. There was a widespread assumption among the policyholders surveyed that more illnesses would be covered than was actually the case under a standard critical illness product. 46%, for instance, thought they were covered for all types and severity of cancer. 

Consumers were also confused about whether the salesperson was providing information only or advice and a personal recommendation.

All those surveyed felt the information they had been given at the point of the sale was sufficient to convince them that the policy was appropriate, but their recall of the details was hazy. Just under a quarter (23%) thought the policy would pay them a regular income if they made a claim. Only half were aware they would get a lump sum. And only 26% were found to have actually read the policy documentation fully.

The research was based on a sample of 500 consumers who purchased critical illness cover between March and May 2008.

The FSA anticipated that during this period many firms would not yet have implemented the changes needed to put the new rules into effect. The study, however, provides the regulator with a baseline against which to measure any future improvement.

Stage two of the research will take place over the summer and autumn.