Three ways to look at the latest trauma products

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Russell Hutchinson looks at the emergence of severity-based trauma cover and offers some ideas for advisers about how to use these products.

Monday, June 30th 2014, 6:33PM 3 Comments

by Russell Hutchinson

The idea of making a payment proportionate to the impact of a condition or disease is not new. In fact, ‘severity-based’ is really another term for ‘principle of indemnity.’

Indemnity means we should put the client back in the situation – financially – that they were in before the loss. When insuring cars, houses, and boats that’s always been easy to do. When insuring lives and people it has always been trickier.

Trauma started off with a limited set of trauma events, each very serious, and a lump sum payment. Competition ensured that the contracts would cover more and more conditions, with more generous wordings. 

Advances in medicine meant earlier diagnosis, improvements in treatment, better survival rates, and more chance of a faster return to a normal life. We arrived at a situation where some clients could achieve very high sum insured payments for something that could have had no great impact on lifestyle or income.

That means high premiums and a concern for insurers: the principle of indemnity is being breached and lots of people who should buy Trauma perhaps aren’t because of those high premiums.

Severity-based Trauma has been arriving in stages for 10 years – longer lists of “diagnosis benefits” – which are in fact limited benefits paid for early stage diagnosis of a serious condition are in a way ‘severity-based’ payments.

In chronological order we can add the following developments:

• Fidelity’s LifeCare benefit, which when bought with its full trauma benefit creates an expanded list of conditions with levels of payment,
• Sovereign’s Progressive Care product which has a comprehensive range of conditions paying out in four stages, and
• Partners Life’s Serious Condition Cover which has a very large schedule of conditions and a detailed schedule of payment amounts which vary a great deal to ‘tune’ each payment to each condition.

In presenting these together I could offend each insurer – arguably they are each unique, and they are, in truth, difficult to compare directly. At a very high level: each assigns different benefit levels to different conditions and stage of diagnosis.

What do advisers think about this?

Based on a survey we did a few months ago I believe there are three main views amongst advisers.

• Some don’t like or sell any Trauma: they see this area as a low priority when compared to medical insurance and income protection insurance.
• Some want only ‘the best’ – they are real advocates for Trauma and seek only the broadest definitions and the highest level of payment at the earliest point. This group is unlikely to support severity-based products.
• Finally what we might call “Pragmatic Advocates” - advisers who are pro-trauma and try to make it fit in the budget for as many of their clients as possible, even at lower sums insured. This group will use more severity-based trauma than the others.

Whatever your viewpoint, it is worth looking into these products and coming up with an approach that fits with your view of how financial protection should work for your clients.

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