A controversial proposal by the insurance industry to water down the benefits payable from a popular type of financial protection cover has been widely criticised.
If the move goes ahead, experts say it will cause ‘irreparable damage’ to the appeal of protection insurance and harm the industry’s already tarnished reputation as consumers accuse it of using ‘technicalities’ to avoid payouts.
The controversy is centred on critical illness insurance which is sold by most leading insurers including Aviva, Legal & General and Royal London.
A controversial proposal by the insurance industry to water down the benefits payable from a popular type of financial protection cover has been widely criticised
The cover provides a pre-determined lump sum payment if the policyholder suffers a serious illness. The illnesses that result in the most claims are cancer, heart attack, stroke and multiple sclerosis.
It is often sold alongside life insurance and arranged when people buy a home. Last year, more than 400,000 policies were bought. A 25-year policy with £100,000 of initial cover would cost a 35-year-old around £24 a month.
Yet the insurance industry is now concerned that the cover has become too generous, paying out on cancers that ten years ago would not have been detectable as quickly.
Last year, insurers paid out more than £1 billion in claims, meeting 92 out of every 100 claims met.
A review of the cover available under critical illness insurance has now been ordered by the Association of British Insurers. It has set up a working group to ensure the product ‘remains viable’ in the long term.
Among its proposals is for all stage one cancers (a cancer that is relatively small and contained within the organ it started in) to be excluded from full payment. Instead, diagnosis would trigger a partial payment – 25 per cent – only.
The insurance industry is concerned that the cover has become too generous, paying out on cancers that ten years ago would not have been detectable as quickly
So if someone had cover for £100,000 and got stage one stomach cancer, they would only receive £25,000. The industry argues that many stage one cancers are no longer ‘critical’ because five-year survival rates are close to 100 per cent.
It also fears that as such cancers – thyroid for example – become more easily detectable, it will be hit by a tsunami of claims.
If the proposal gets the go-ahead, the reduced payouts would apply to new policies only.
Protection adviser Alan Lakey is singularly unimpressed with the move.
He disputes the reasons for the curtailment in cover, saying many stage one victims – especially those with pancreatic or brain cancer – do not survive five years.
‘Cancer is cancer,’ he argues. ‘It is a serious condition and critical illness insurance should cover it. By reducing the quality of cover, it would undermine consumer confidence in the product and cause it irreparable damage.’
David Hollingworth, of mortgage broker London & Country, says: ‘Being told you have the wrong type of cancer will not compute with consumers. The moment they feel insurers are trying to wheedle their way out of paying, cynicism around this cover will explode.’
The Association of British Insurers says the proposal is merely up for consultation and no final decision has yet been made.