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The Actuary The magazine of the Institute & Faculty of Actuaries
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Healthcare: TPD: A clearer definition

The essence of an insurance agreement is the promise to pay on the occurrence of an insured event. For the insurance to be effective, the consumer has to have faith that the insurer will pay as well as an understanding of the type of insurance cover held. If either element is absent, it is bad news for the insurer and the policyholder. Total permanent disability (TPD) benefit has long been an additional benefit linked with critical illness (CI) policies. A successful TPD claim results when the claimant is either unable to return to their own or any occupation, or cannot perform the required number of activities of daily living (ADL) as defined in the policy.

Unfortunately, successful claims for TPD are relatively rare and research in 2008 by the Association of British Insurers (ABI) suggests that more TPD claims were rejected than accepted. According to the research, approximately 55% of such claims are rejected either because the definition of disability has not been satisfied or because non-disclosure has been uncovered. Such figures lead to unhappy claimants and have caused the industry to consider whether the benefit in its current format is adequately dealing with consumer need.

Working party
This research led the ABI to create a working party to look at the design of the benefit and explore whether there is an alternative way to provide a similar level of cover in a clearer way that consumers are more likely to understand. To undertake this work, the ABI has met with both the Financial Services Authority and the Office of Fair Trading to gain their agreement that such a project can be undertaken without breaching existing competition legislation.

In deciding how the cover produced by TPD could be explained more clearly, the ABI was influenced by the fact that TPD is typically provided as a benefit on a CI policy. Was there a way that TPD could be redesigned to resemble CI? It was felt that such an approach was feasible, and work was initiated to see whether the current occupational and functional definitions of disability could be replaced with new critical illness conditions.

The working party started by analysing the cause of current TPD claims, both those that had been accepted and those that had been rejected. The major causes of claim were musculo-skeletal conditions and mental illness, hardly a surprise to anyone involved in the provision of disability benefits. Figure 1 shows the seven most common causes of TPD claim. A total of 23% of existing claims were classified with a cause of claim as ‘other’. These claims are being reviewed to establish the true cause of the claim: whether this is simply a classification error, or whether there is another group of claims that should be considered.

Having identified the major causes of claim, the next step was to establish whether it was possible to draft CI-type definitions for them. It was recognised from the causes identified that the two most difficult conditions for which to draft definitions were likely to be those for back disorders and those for mental illness. It was felt that if CI-type definitions could be drafted for those conditions, then it could be done for the other conditions.

Redefining TPD
When drafting a CI definition, the idea is to establish a clear objective measure for both the insurer and the insured. This would overcome a lot of the current problems with TPD, where evidence suggests claimants had a limited understanding of what constituted a valid claim. The task for the ABI group has therefore been to determine CI definitions for mental illness and musculo-skeletal conditions that provide broadly similar cover to the old benefit, but which have a clearer trigger as to when a claim will be valid or not. After six months’ work, involving considerable consultation with medical practitioners and other interested groups, the ABI is nearing the point where it will have ‘strawmen’ definitions available for industry consultation. At present the definition for back disorders is being proposed as follows:

Severe back and neck conditions having undergone specified surgery:
>> Proplapsed intervertebral disc having undergone discectomy
>> Stenosis of the spinal canal having undergone decompression
>> Undergoing spinal fusion for pain
>> Vertebral column fracture requiring surgical stabilisation. Spinal injections are specifically excluded.
The definition for mental illness is currently being proposed along the following lines:

Diagnosis of the following confirmed by a consultant psychiatrist specialising in the specific area of expertise:
>> Schizophrenia
>> Bi-polar affective disorder
>> Paranoid (delusional) psychosis
>> Schizo-affective disorder.
Or:
>> Diagnosis by a consultant psychiatrist of a severe depressive illness which has chronic unremitting symptoms which have not responded to comprehensive management and treatment for which the individual has complied, based on the best current UK clinical practice, for a period of greater than 12 months and has resulted in an in-patient admission to a psychiatric in-patient ward for more than seven consecutive nights.

Mental health problems such as mild to moderate depression, anxiety and stress amongst others, are not covered. These definitions would represent a major change compared to the existing TPD definitions. When adjudicating TPD claims under the current definitions, the focus is on proving total and permanent incapacity, either such that the person cannot return to work as defined, or such that they are incapable of performing the ADL. This can be a long, drawn-out process, and the claimant’s view of TPD is often quite different to that of the insurer’s, leading to many unhappy TPD claimants.

The proposed approach intentionally makes no reference to ongoing function. With regard to severe back and neck problems, the proposal is to determine validity based on the claimant undergoing surgery. Surgery is deemed the treatment of last resort for such conditions. For mental illness, validity of the claim is being proposed on one of two triggers — either the confirmed diagnosis of specific severe conditions, or satisfying a definition of severe depressive illness which has not responded to optimum treatment, lasted more than 12 months and required more than seven consecutive nights on a psychiatric ward. These definitions are still very much a work in progress and more must be done in terms of drafting, consultation and, most importantly, looking at the likely incidence of future claims, remembering that the intention is to have broadly similar cover to before.

The ABI is proposing that any changes to TPD are tied into the next review of the Statement of Best Practice for Critical Illness which is due to take place this year. The ABI’s proposals for the revisions necessary to the statement are likely to be issued for industry consultation in late June 2009. These proposals will include the new CI definitions being put forward to replace TPD. Assuming the changes to TPD proposed by the ABI are accepted by members, insurers will be required to replace current TPD benefits on CI policies with the new definitions.

Consultation by the ABI with members will take place over the summer into September. Responses to the consultation will then be considered and the revised Statement of Best Practice for Critical Illness will be published in December 2009. As with previous versions of the statement, members are then likely to be given up to 12 months to implement the changes.

It is hoped that the proposals being put forward by the ABI will improve the confidence of consumers, enabling them to choose the policy that is right for them by making clear exactly what is covered and when insurers will pay.

Peter Barrett is the head of claims for the International Division of Reinsurance Group of America and a member of the ABI CI working party