Are trauma products still fit-for-purpose?
Steve Wright suggests it’s time to rethink trauma policies so they are more equitable rather providing wind fall gains to some policyholders.
Friday, July 12th 2024, 6:34AM
by Steve Wright
The problem for Dr Marius Barnard was that, while his patients were surviving for several years after suffering a ‘dread disease’ (due to advances in medicine), they were dying financially.
What was needed was money to cover the associated high costs of treatment and reduction in income earning ability. Insurance seemed a logical answer and in 1983 Crusader Life stepped up and launched the first ‘Dread Disease Insurance’ policy.
It covered four ‘dread diseases’: cancer; heart attack; stroke and coronary artery surgery.
And so, Dread Disease Insurance spread around the World. Fortunately, the initial name didn’t stick, we got Critical Illness Insurance, Trauma Cover and a host of other names instead.
Over time trauma products became much more generous too. The number of dread diseases covered rose steadily, and the definitions of covered ‘dread diseases’ softened, even as advances in medicine and the treatment of dread diseases meant life expectancy following a dread disease grew from two, three or four years in 1983 to much longer.
As a result, the financial impact of some covered dread diseases as defined has reduced almost to nothing. In cases of severe trauma, the financial impact has probably increased, not only because people are living with debilitating dread disease longer, but also because of the very high costs of new and innovative, sometimes experimental, medical treatment options now becoming available.
So, back to the question, are today’s trauma products fit-for-purpose and if they are not, can your advice be fit-for-purpose?
Firstly, we must decide what the purpose is.
- If it is to provide a modest amount on suffering a dread disease, even windfall gains (where minimal financial impact arises) then most current trauma products probably are fit-for-(that) purpose. Unfair as it undoubtedly is, let’s call this the ‘nice to have some purpose’.
- If the purpose is to properly indemnify the client against the actual potential financial cost of a dread disease, then my view is that almost all trauma products in New Zealand are no longer fit-for-purpose for most clients because they are simply unaffordable at the levels needed. Let’s call this the ‘actual indemnity purpose’.
Most products are not fit-for-purpose because their generosity and resulting claims pressure has raised the premium rates of typical trauma products to levels which don’t allow the vast majority of Kiwis to afford sufficient cover to properly indemnify them against the high financial consequences of a severe trauma.
Last time I looked, the average trauma cover sum insured was under $80,000. The median sum insured will be lower still and many have no trauma cover at all.
There are some who argue that trauma cover needs are satisfied generally by a sum insured of around $50,000. I don’t agree with that number.
There are plenty of reported cases of people needing treatments, for cancer for example, which are very expensive (think $500,000 just for the treatment) and not available or funded in New Zealand.
A few medical insurance products may cover some of direct medical costs but not all costs (think loss of income for spouse or partners required to take time off). Also, medical insurance typically doesn’t cover ‘experimental’ treatment.
Regardless, $50,000. does not sound like enough to me. No one can predict whether they will suffer a dread disease or if they do, how severe it may be or how high the financial cost might be.
In my opinion, paying a large premium for a product that pays when I don’t need it too [nice as that may be if I have a minor (minimal financial consequence) claim] but doesn’t pay me enough when I have a serious (high financial consequence) claim, is more like gambling than insurance.
I think insurance should be about indemnifying against loss, not providing windfall gains.
So, how can we do better for our clients?
- Firstly, as advisers, we need to recognise the problem and find a solution to the actual indemnity purpose: in my view that means finding insurance solutions that only pay benefits for serious dread disease, that don’t pay money for conditions that have only minor financial impact, and which are priced to make sums insured much greater than $50,000 affordable.
- Secondly, we need to put pressure on insurers to create the necessary solutions. At the moment, I know of only two providers whose trauma product offering is fit-for-(both) purposes. Other companies have some product development work to do.
I’m not saying there is no place for generous but expensive trauma products that satisfy the nice to have some purpose, there is.
I’m saying we also need trauma products that don’t pay windfall gains, which are much less costly, and which more appropriately satisfy the actual indemnity purpose.
Perhaps it’s better to split trauma advice into separate trauma needs and apply separate solutions appropriately so that we suitably achieve both purposes.
If we do this, determining the necessary separate sums insured may actually be easier, make our advice fit-for-purpose and allow clients to more easily understand their needs, allowing better decision making and more appropriate levels of trauma insurance cover.
Steve Wright has qualifications in economics, law, tax, and financial planning. He has spent the last 20 years in sales, product, and professional development roles with insurers. He is now independent and helping advisers mitigate advice risk through training and advice coaching.
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