A protection topic so hot at the moment you could burn your hands on it, is own occupation income protection policies against any occupation.
Some say it should be an own occupation-only world. Others say while work task definitions are problematic, advice and understanding was ultimately to blame, not the products. Either way, income protection has received a fair amount of bad press lately and most have agreed it is a sector that can do without the negative attention.
When you take an income protection policy there are varying methods around how an insurance company will assess your ability to work when you claim.
Generally speaking, with occupation-only, if you cannot do the specified occupation, there should rarely be problems claiming. For the any occupation, things get a little murky.
A policyholder may need to prove functional ability under work task definitions. This can sometimes include proving such things as inability to climb stairs or read words on a computer screen, so making a claim can be less straightforward. Then there is suited occupation. To claim, you must not only prove you cannot function in your own occupation, but any suited occupation that your education, training and experience relates to.
For example, a case study from Friends Life in its incapacity definitions for group income protection used the example of a male paint technician for a car manufacturer who had fractured his arm. Suggested related occupations were a vehicle parts operative, an electronics assembler or stock controller or stores assistant.
To reach this conclusion Friends Life will go through a transferable skills analysis.
The factsheet stated: “A TSA involves a detailed review of the claimant’s work history, education and training, and medical file to identify occupations that utilise their skills while taking into account any reduction in function due to illness or injury.”
But the definition of suited occupation will vary from provider to provider - and like the open definition of any occupation, herein lies the main point of concern.
Around half of income protection providers continue to use the definition, particularly for high-level occupations.
Andy Couchman, co-chairman of the Protection Review, said IFAs should only be selling own occupation and suited occupation.
“It is very clear. If a person cannot do his job and cannot be in work then he can claim and get enough income until he goes back to work,” he said.
“This and suited are very close. The problem is the rest of it and work tasks definitions. It looks at functional abilities and you would have to be in a pretty bad way to tick some of the boxes to claim.”
Mr Couchman said it was the most important aspect of any income protection policy. It was not about price or the benefits, he stressed, but the definition of being able to claim.
He added: “There is no point hunting around for cheaper prices if it will not pay out. And the question is where do we go next with these concerns?
“Any occupation should not just be banned altogether but the industry needs to find a better definition.”
Mr Couchman pointed out that the friendly societies only do own occupation and so claim statistics were really promising, adding that any occupation and not being able to claim for income protection was not doing the reputation of the industry any good.
A Protection Review survey asking whether any occupation was a concern, 20 per cent said no, while 80 per cent said yes.
Responsibility
But where does the buck stop? With the advisers or the providers?
James Brooke, wealth architect at London-based IFA Altior Vita, said the firm would only advise on own occupation policies. He explained what any occupation covered was too wide-reaching and undefined so payout was unlikely and thus defeated the point in taking out a policy in the first place.
He said: “It is not the provider’s fault if the policy does not pay out and they have followed the definitions properly. The onus should be on the regulator really to ensure policies are sold right. And someone is selling these policies whether it is an adviser or direct offering so it should be clear what is being purchased.”
Mr Brooke explained that own occupations tended to be more pricey - sometimes 10, 15 or 20 per cent more than any occupation. Some have argued that if price was an issue, it would be better to have some than nothing, even if it was any occupation.
Mr Brooke explained there were other ways to combat price. Premiums decrease as the deferred period increases so choosing a “suited occupation” to begin with would likely reduce the cost of the policy.
He said: “You could go for a combination of a longer deferred period to keep premium down or going for something like an accident or fitness policy for up to a year of cover. There are ways to combine different types of protection in a cheaper package.”
And in his view, the FSA exclusion of liability policy did not quite cover the issue.
The FSA stated in policy statement 07/24 Insurance Selling and Administration: “Exclusion of liability: the rules have been changed to say a firm must not seek to exclude or restrict, or rely on any exclusion or restriction of, any duty or liability it may have to a customer or other policyholder unless it is reasonable for it to do so and the duty or liability does not arise under the regulatory system.”
The issue, Mr Brooke said, was that it was not an exclusion but more a lack of exact definitions.
He said: “I do not want to treat my clients like idiots and things should not be dumbed down but people can only make the right decisions with all the information. The FSA requirements for significant exclusions to be pointed out does not quite do the job because exact definitions need to be made.
“And the sales with or without advice need to be looked at.”
Income protection specialists British Friendly are a mutual and only offer own occupation.
Ageas Protect, Aviva and LV= have all said they would be looking to include more job classes in own-occupation definition for income protection by the end of the year.
Nicola Culley is senior features writer of Financial Adviser