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Life Assurance
Wednesday, October 1, 2008
Disclosure grid

Critical illness insurance products should become a lot less confusing once life insurers get the go ahead to implement a ‘standard disclosure grid’. This has been developed by the Life Offices’ Association (LOA) to indicate to policyholders what percentage of the insurance cover will be paid out for different severity levels for four major medical conditions: heart attack, cancer, stroke, and coronary artery by-pass graft.

These four categories make up between 70% and 90% of all critical illness claims under what are also referred to as ‘dread disease’ or ‘severe illness’ products. A disclosure grid will be published to cover four severity levels for each medical condition.
Speaking at the LOA Risk Insurance Forum held in Johannesburg last month, Gerhard Joubert, CEO of the association said that once the best practice recommendation had been implemented consumers will find it both a lot easier to understand critical illness products and to compare the benefits offered by the different life companies.
He says while the LOA would have liked to have made the standard disclosure grid mandatory for all member companies, there is a concern that the Competition Commission may regard this in an unfavourable light. “However, 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 we have had the opportunity to engage with stakeholders including the Financial Services Board, National Treasury and the Competition Commission.”
He 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 they are designed to cater for various complex, uncertain and unpredictable events. But we acknowledge that the absence of standard industry disclosures and definitions further increase the complexity and uncertainty.”
Joubert says this realisation prompted the LOA to set up the Standardised Critical Illness Definitions Project 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. Its 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 having 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 will need 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. The new definitions will only be applicable to critical illness polices sold after the implementation date, which still needs to be finalised.

Copyright © Insurance Times and Investments® Vol:21.9 1st October, 2008
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