ProtectionOct 29 2014

STIP claims

twitter-iconfacebook-iconlinkedin-iconmail-iconprint-icon
Search supported by

With many consumers believing insurers will do anything to duck out of paying a claim, the news that the Association of British Insurers (ABI) will start collecting claims data for short term income protection (STIP) plans is a significant step forward. But, with concerns about the figures that will be disclosed, it could be the catalyst for a major overhaul of the market.

The decision to collect claims data (see Table) was made in a meeting held between STIP providers and the ABI in September. Although the details are yet to be finalised, the Association intends to carry out a trial run on claims made on both STIP and mortgage payment protection insurance products in 2014.

An ABI spokesperson said the trade association was keen to explore the potential to expand on the claims data that it already collects and publishes on protection insurance products. However, before it considered whether it was suitable for publication, it would need to ensure that it was able to collect thorough and high quality data.

Public reassurance

This move has been broadly welcomed by the protection industry. Emma Thomson, life office relations director at LifeSearch, says the principle of publishing claims statistics is sound because it gives considerable reassurance to customers and advisers. “Insurers do include their claims statistics on their adviser sales aids as well as on some of their consumer literature,” she says. “They are a key selling point as they do show that a high percentage of claims are paid.”

As well as providing reassurance to consumer and adviser alike, putting these statistics in the public domain has also helped to increase the number of claims that are paid. For example, according to ABI data, while 91.8 per cent of critical illness claims were paid in 2013, in 2005 this figure was only around 80 per cent.

The ABI’s reluctance to publish the first wave of STIP claims statistics it collects is also understandable. While publishing statistics on life assurance and critical illness was relatively straightforward, there was considerably more resistance when it came to income protection. In particular, insurers were concerned about inconsistencies in the figures because there was no standard way to produce them.

Eventually though, these grievances were dispelled when the ABI worked with the industry to develop definitions for paid and declined claims. These were used for the first time on the 2013 statistics, which were published earlier this year.

Apples and oranges

But while getting agreement on the type of data that should be collected was problematic for income protection, the STIP market presents an even greater challenge. In addition to the potential for insurers to use different methodologies when calculating their claims statistics, differences in product types could make comparisons difficult.

A variety of products sit under the STIP name including policies based on traditional long term income protection, accident sickness and unemployment (ASU) and payment protection insurance (PPI). Because of this, Mark Myers, chief executive of British Friendly, says it will be essential to ensure the industry compares like-for-like as much as possible. He explains: “There are grey areas around the definition of the products. While, for many, STIP refers to a proper income protection plan with limited payment period, for others it is accident and sickness cover. Publicising paid claims rates is important to help restore trust, but the data must be meaningful.”

Making data meaningful

The differences between products that fall under the STIP banner presents a number of challenges. For example, at the more generous end of the scale are plans such as British Friendly’s BFS Protect, LV=’s Budget Income Protection and Bright Grey’s Income Cover for Sickness. These are based on the traditional long term income protection product but with a limited payment term of one, two or five years.

Providing premiums are paid, these plans will continue to provide cover until the policy end date, typically up to age 70, regardless of the number of claims that occur. In addition, these policies are usually written on the most generous own occupation definition.

Conversely, and although it also pays for one or two years, a PPI policy is an annually reviewable contract. This means there is no guarantee over the future availability or the cost of cover. Further, unlike the income protection-based product it is not underwritten and most policies are written on a suited occupation basis, which can cause problems at claim if the policyholder is able to carry out other roles.

In addition, some PPI policies as well as ASU policies will also cover involuntary unemployment. Given all these fundamental differences, unless there is a means to differentiate between the products, it will be difficult to draw any meaningful comparisons.

As well as concerns about comparing such different products, some industry experts are worried about how the publication of STIP claims statistics might affect the income protection figures already in the public domain. “There is some natural nervousness about what the figures might look like, especially if you include the unemployment claims statistics,” says Steve Devine, chairman of Protect. “The figures look good for long term income protection at 90 per cent and above but there is a risk that, if the STIP figures are significantly lower, this will affect the reputation of the more comprehensive product.”

Creating clarity

Rather than risk this, many in the protection industry would like to see greater clarity around the STIP products to ensure that consumers are able to access affordable cover. Mark Jones, head of protection at LV=, says it is better to have some level of protection than none at all. “STIP can act as an extremely useful stop gap,” he say. “But it is important that people understand the type of policy they are taking out and that there are long-term products available too.”

A number of attempts have already been made to try to clear up the differences. On the back of the PPI mis-selling scandal, and following industry concerns about consumer confusion, the Competition and Markets Authority reviewed the STIP market.

Based on its findings it laid out a definition for STIP as an insurance contract that paid out when the policyholder experienced involuntary unemployment or became unable to work as a result of an accident or sickness. In addition, the contract should be written for a term of less than five years; could include other forms of insurance cover or benefits; and could be terminated by the insurer.

This, says Kevin Carr, managing director of Carr Consulting, did little to help reduce the confusion. “A renaming exercise is interesting and there was also a code of conduct idea from the Income Protection Task Force a few years ago. The trouble is sales are so low that some insurers are not particularly trying to expand the market. It is a bit of a chicken and egg scenario,” he explains.

While a full scale renaming exercise may not be on the table at this point, one option for those tasked with assessing the figures the ABI collates is to separate underwritten products, typically those based on full income protection, and non-underwritten products such as ASU and PPI. This would get rid of potential confusion and help to highlight the more generous cover available on an underwritten product.

However and whenever the claims figures are published, with the ABI agreeing to collect this data, the protection industry is a step closer to providing more transparency to consumers. And, if the figures are on a par with those for the full product, it can only help to reassure the public and boost sales.