This guide is based on UK law and was last updated on 28th February 2011.
The Association of British Insurers (ABI) has decided to retain the term "total permanent disability" (TPD) in its revised Statement of Best Practice for critical illness insurance cover. The Statement replaces the previous version published in April 2006.
TPD is backed up by a set of standard definitions, more descriptive headings and an education plan to improve understanding and cut down the number of declined claims.
Nick Kirwan, the ABI’s Assistant Director, Health and Protection, said the changes would make the scope of TPD cover much clearer. "The project has attracted a lot of interest from many countries as these are the first standard TPD definitions in the world," he said.
The revised Statement was issued in February 2011. ABI members are required to implement the changes into their wordings as soon as is practical and, in any event, no later than the end of 2012.
Critical illness cover
Critical illness insurance pays out a tax-free lump sum if the insured is diagnosed with, or dies from, one of a specified list of serious conditions. It is usually included as a standard feature or optional extra in long-term products such as endowment policies, whole of life and term insurance. But policies can vary greatly in the cover they offer.
The Statement of Best Practice aims to ensure appropriate minimum standards of cover and help consumers understand and compare products by defining commonly used terms and providing model wordings for certain critical illnesses and exclusions. It also provides guidance on how the cover should be described and explained to customers.
The statement is updated at least every three years. The delayed 2011 revisions build on proposals emerging from the 2009 review and subsequent stakeholder discussions.
The ABI's research has shown that, while most critical illness claims are assessed and paid promptly, the small proportion that do go wrong almost always do so for one of two reasons: non-disclosure of relevant information or disputes about what the policy covers.
Previous work by the ABI on non-disclosure is showing benefits. In January 2009, it upgraded its guidance on the fair treatment of claims under long-term protection policies to the status of a code of practice.
The code, which applies to life, critical illness, income protection and other long-term protection insurance products, sets out the approach insurers should take when a policyholder has failed to disclose relevant information.
In its annual review for 2008/9, the Financial Ombudsman Service (FOS) reported that the code (and the earlier guidance) had resulted in fewer cases about non-disclosure of medical history being referred to the ombudsman. In those cases the FOS did see, it agreed more frequently than before that the insurer had acted fairly. According to the 2009/10 annual review, this improvement has continued to reduce the number of referrals.
The ABI now hopes to build on this success by improving consumers' understanding about what critical illness policies will and will not cover.
Total permanent disability
Total permanent disability (TPD) is covered by most critical illness policies. In the absence of any model definition, however, each insurer applies its own interpretation to assess whether someone has become totally and permanently disabled.
Broadly, TPD has been taken to mean that the person is too ill to work. Insurers, however, have devised different ways to assess TPD according to the person's inability to carry out their "own", a "suited" or "any" occupation, or, if not in work, a number of specified daily living activities or functional tests.
But research has shown that consumers do not really understand the meaning of "total" or "permanent". And because TPD is often linked to being unable to carry out an occupation, they can confuse it with income protection and assume the policy will pay out a monthly income for a period when they cannot work.
As a result, TPD coverage disputes are common. Although TPD accounts for only 3% of all critical illness claims, 55% of TPD-related claims are declined by insurers. 35% of complaints to the FOS about what is covered under critical illness policies concern TPD.
In June 2010, the ABI proposed replacing TPD with the term "irreversible life-changing disability". But, following consultation with the industry and further consumer research, it reversed that decision in November 2010.
Nick Kirwan said the ABI's customer research did not strongly support the name change. "After careful consideration we have now agreed standard definitions, training packs for advisers, an online hub of information and much clearer steps for customers which we believe will make the process easier and increase successful valid claims," he said.
Section 3 of the Statement, therefore retains the TPD heading but the definitions have been extended to make the scope of the cover clearer.
There are now five model TPD headings: being unable to do your own occupation ever again; being unable to do a suited occupation ever again; being unable to do any occupation at all ever again; being unable to do three out of a list of specified work tasks ever again; and being unable to look after yourself ever again.
Each heading is followed by a definition explaining the terms used. "Own occupation" means a trade profession or type of work that the insured does for profit or pay. It is not a specific job with any particular employer and is irrespective of location or availability.
A "suited" occupation means any work the insured could do, taking into account their employment history, knowledge, transferable skills, training, education, experience and level of remuneration, irrespective of location or the availability of work. "Any" occupation means any type of work at all, irrespective of location or availability.
In all three "occupation" cases, disabilities for which relevant specialists cannot give a clear prognosis will not be covered.
The specified work tasks include a person being unable to walk more than 200m, or climb up and down a flight of 12 stairs, lift 2kg in weight or get in and out of a standard saloon car on their own, even with the use of special equipment routinely available and having taken any appropriate prescribed medication.
Being unable to look after oneself involves the loss of the physical ability to do at least three of six specified tasks unaided, even with the use of special equipment routinely available to help: washing, getting dressed and undressed, feeding oneself, maintaining personal hygiene, getting between rooms and getting in and out of bed.
During the working group discussions, it was noted that, when based on physical activities alone, TPD does not currently cover disability resulting from a mental health condition, other than in the most extreme cases. The ABI has decided not to change this, but has said that, if a mental health condition becomes a feature of the market, it will take this into account in future reviews
The revised Statement also sets out final standard definitions for cancer, Parkinson's disease and terminal illness.
The definition of Parkinson's disease explicitly excludes Parkinson's disease secondary to drug abuse and other Parkinsonian syndromes. The definition of terminal illness makes it clearer when an illness is considered terminal.
There is also a new standard wording for the pre-existing medical conditions exclusion in children's critical illness cover. The ABI says children’s cover is one of the most common causes of claims under critical illness policies.
Group critical illness cover
Insurers offering group critical illness cover should follow the provisions relating to Generic Terminology and model wordings for critical illness definitions and exclusions. The other provisions of the Statement do not apply.
Simple financial products
Critical illness cover is one of the types of insurance the Government hopes can be developed as a "simple financial product". The aim of such products would be to "do what they say on the tin", allowing consumers to understand and compare products more easily.
In its December 2010 consultation paper, the Government proposes that savings accounts and protection products would be the most suitable candidates for a simple products regime. The paper points to the ABI's Statement of Best Practice for critical illness cover as an example of how some degree of standardisation could be possible for a wider product range.
Contact: Bruno Geiringer (firstname.lastname@example.org / 020 7418 7306)