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 
13 Comments
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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Comments from our readers
On 31 July 2024 at 6:10 pm 37 years too long said:
I'm not sure that the current market solutions are particularly fit for purpose. Partners Life's Severe Trauma, that only pays for cancer if all treatment modalities have failed and nothing further can be done, is not much better than the TIB benefit built into life cover. The Fidelity and AIA products that pay for up to 5 different conditions aren't really a solution either. Partners Life gives clients the ability to buy a piece of Comprehensive, Moderate and Severe to manage the escalating cost as a condition worsens. However, many clients might opt for one or other of these and not a combination. Even Partners Life's Evince tool only recommends a combination of Comprehensive and the particularly undesirable Severe Trauma (no Moderate Trauma). Perhaps, rather than a policy that pays an amount for each condition suffered, clients could buy a trauma policy that multiplies out the payment amount as an illness becomes more serious. Seriousness might be measured by the condition and its impact on the person's life. If linked to life cover the TIB benefit would take care of the serious/terminal end of the scale. $50,000 for an early-stage trauma and a further $100,000, if it becomes more serious, might work. On 2 August 2024 at 3:24 pm JPHale said:
Good discussion Steve.
I'm in the camp of the nominal need because the need for the original trauma product of old has been surpassed by benefits that now cover the issues relating to the loss of income and medical treatment costs related to severe conditions.
While we can wax lyrical about the merits of progressive, multi, and severe cover types against traditional comprehensive lump sum covers and more essential covers, the reality is that this product is used like a square peg in a round hole if you expect it to do everything as it was originally intended.
Not to mention the budgetary concerns that come with lots of different layered trauma covers attempting to respond to the client's needs with little cost management flexibility other than reducing coverage.
We're often overcomplicating the discussion, and while there are risks with income and medical policies not responding to client needs, the same applies to trauma covers, too.
Sure, you will have some fringe and exceptions that benefits won't respond to, at the same time, the claim on my desk today is a heart attack that's not a heart attack on old wording that doesn't get passback, nor was it able to be upgraded in the past due to underwriting considerations either.
With an effective trauma, income, and medical plan in place, it is typically more flexible to adjust for changed needs and pricing if you haven't managed to set it on level premiums.
The issues of future income lost and medical costs experienced are quite well qualified, and the majority of current on-sale benefits respond quite well.
Advice risks need to be clearly identified, aka my unfunded medicines discussion from a few weeks ago and other areas relevant to the client's situation.
End of the day, you can't answer or cover every situation, but you can put a good plan around the client's needs and risks that is both affordable, will respond well, and isn't playing Lotto ticket games.
For the reality is when these issues strike people down, the three big questions are:
1. Will I get treatment?
2. Will my income be ok?
3. Will my family be ok?
Often with number 3 being the first question.
On 4 August 2024 at 12:37 pm Steve Wright said:
37 years too long: I agree with much of what you say and I might even agree that Partners Life’s Severe Trauma Cover was little better than terminal illness benefits under life cover if:
• it only paid benefits for cancer and no other conditions; and
• a diagnosis of either stage 3 incurable cancer or stage 4 cancer meant a continued life expectancy of only 12 months or so.
Neither of these is correct.
Yes, the condition suffered must be serious before a claim is payable under Severe Trauma Cover, but many covered conditions will not be terminal and will allow a client to live on for many years, albeit with significant disruption to their lives and lifestyles. Empirical data shows that even with a stage 4 cancer diagnosis, life expectancy (with suitable treatment) can be up to five years and longer, depending on many factors, including type of cancer. This is based on data gathered over many years and does not fully take recent promising immunotherapy developments into account. I suspect survival rates are lengthening. What might the next few decades bring?
My own experience of stage 4 cancer with a close friend illustrates this perfectly. He was diagnosed with fairly advanced stage 4 bowel cancer, thanks to the Waitemata DHB (as it was) screening program, after never having a symptom. Surgery and chemotherapy etc. followed for about a year or two (I don’t recall exactly) and after treatment he had five or six good years, when he was not disabled (could not have claimed an income protection benefit). About eight years after diagnosis his health suddenly deteriorated (from tumours that eventually developed in the brain) to the point he was unable to work, and he passed away about 4 months later.
Five years and maybe more is a reasonable amount of time, the question is: how does someone with that amount of life left want to spend their remaining time? Do they want no option but to keep working, or, do they want the financial ability to allow other things?
Not being disabled will mean no income protection claim and continued financial pressure to work for most, but it doesn’t have to be this way. For some, insurance is only a backstop to prevent poverty, for others it’s about being able to afford alternative choices.
As insurance advisers, I think it’s our duty to show our clients these different options and possibilities. We should take a long view for clients and consider the uncertainties of the future as best we can, even though today we can only recommend them today’s products!
I value insurance plans that are flexible and can respond to clients’ needs over the decades they need cover and into retirement. Partners Life’s trauma offering allows for this in ways most others don’t.
On 4 August 2024 at 12:43 pm Steve Wright said:
JP: The problem you don’t mention is the cost of unfunded and ‘experimental’ treatments (not covered by health insurance). My suspicion is we will continue to see an exponential growth in new medical procedures and technology with an accompanying growth in new effective treatments that may take many years to be ‘approved’ and covered by health insurance. Income protection and medical insurance won’t fund this, and most don’t have enough trauma cover because they can’t afford it – hence the point of my opinion piece.
Families are always better off financially with more money – Severe Trauma Cover allows for much higher claim benefits if very serious trauma conditions strike – some might even argue that’s exactly what insurance should do, pay more money when more money is needed!
On 5 August 2024 at 7:27 am Backstage said:
I disagree with terminology such as, windfall. I truly believe the argument on fit for purpose and all the variations of severity over complicate and confuse not just clients but also advisers.
I could not even imagine a poor client trying to remember the actual terminology of severity on the product they purchase and then on diagnosis of a critical illness being told they are not sick enough.
Lets avoid adviser and client confusion and if you market full trauma cover which will likely be very budget related when it comes to the amount purchased, will avoid this windfall BS.
On 7 August 2024 at 8:15 pm JPHale said:
@Steve the challenge with the “experimental”treatments is they are at the extremely unlikely end of the risk spectrum.
I agree that the severe trauma product can assist for this and has a price point. At the same time when we talk risk, the real risk and need here is quite low.
When you consider that medical costs of some sort is a 100% risk, disability or trauma before age 65 sits around 30-35%, death is somewhere in the 6-8% range before 65, with TPD sitting around 4-6%, we get into the area where cost vs risk reaches a point where people start to consider lower risk acceptable. That 1 in 20 chance thing where they start to take coverage.
This is the bit often overlooked in the academic approach to risk. The art side of the science.
What gets missed is the behaviour and psychology of people making decisions for themselves, this is where the products with less incidence risk get cut out of plans.
Budgets only go so far and people buy the bell curve. The more budget they have the wider the bell, but most have limited budgets, thats why they need insurance in the first place.
When we get into it, the need for unfunded cancer medicines sits somewhere around 15% of cancer claims needing unfunded medicines. With about a 30% population risk for cancer. We’re at about 4.5% population risk of need for unfunded cancer medicines.
The risk of “experimental” claims from there is a very small % of the currently approved unfunded medicines available. Not to mention that the need for these medicines isn't always a trauma claim trigger. The two experimental ones that have crossed my desk didn't trigger trauma buy a long way.
Despite my recent musings on unfunded meds, the issue I raised there is one of knowledge not lack of cover. If the treatments had been administered in line with the indicated use the claim declined would have been paid by the insurer.
Which is where we get to when balancing budgets and benefits, and where people make choices about the big issues being covered and the fringe ones being the lifestyle they desire over the very low what if risk.
Good cover for medical and disability remains a priority, as too life cover. Trauma comes in fourth and TPD last for most consumers. Pretty much in line with the risks they face.
On 12 August 2024 at 2:30 pm jan mackie said:
Agree with backstage that terms such as windfall are not helpful as the customers often have genuine conditions.
JP makes some great points as ever although I do not always agree that the priority for different types of insurance should reflect the expected claims incidence rate. The severity impact also comes into play. If I book a cheapo jetstar flights regularly then over a year it is quite likely I will suffer from delays. I do not insure this despite a high incidence as the severity is something I can handle. However if I have a transit in the US the likelihood of a medical condition during the short stop over is low but the severity of medical costs could be high so I take out insurance.
JP your percentages looks accurate (as one would expect). Hope you do not mind but I did an approximate fact check by looking up the Complete cohort life tables from NZ stats. Looking at the latest tables using 2021 data the tables show a male born in 1981 so aged 40 was expected to have a probability of circa 7% of passing before age 65. Similar percentages apply for age 50. One would expected insured lives to be healthier due to underwriting so your estimate is ball park.
On 13 August 2024 at 4:35 pm Steve Wright said:
Jan. A windfall gain does not deny a client has a genuine condition. It simply refers to a situation where the condition causes the client no monetary loss, yet they still receive an amount of money because of it.
I know of a case where a man had an angioplasty in the morning and flew to the USA that night for a conference, his only inconvenience being a plaster on his wrist and presumably some medication. His medical costs were paid for by his medical insurance and by his own admission, he suffered no financial loss at all, yet he was entitled to be paid 25% of his trauma cover sum insured. Nice as this might be for him, this makes insurance expensive, inefficient and unaffordable in sufficiently high sums insured.
My argument on doing better to properly cover severe financial impact trauma conditions is the same as your own example of a cheapo flight with relatively high incidence causing delays with low financial impact, you don’t need insurance for that. You do however need to insure the high-cost, low incidence, medical condition in the USA.
On 14 August 2024 at 7:34 am Backstage said:
@Steve I still think you are over cooking this. It is not my position as an adviser to estimate the cost of or availability of medical supplies and or medications.
I also disagree that its essential that someone has to be financially crippled to benefit from insurance otherwise they have won the lotto.
It is my job to assist a client simply, without complication or jargon to understand the financial impact to the household or business in the event of an untimely death or a long-term illness or injury. Then to assist with guesstimations, because, lets face it, thats what they are, on how much money could be helpful.
I am not going to spend all day getting into the weeds on whether one company will valet your car every month for 2 years if you happen to be on claim for 12 months. And explain that this will be determined however on how severe your illness is and how QuoteMonster rates car valets.
That 1 gentleman in the US had an angioplasty and suffered no financial loss and got paid a Trauma claim is justification for the use of the term windfall is sad and the term sounds envious. Let the insurers determine justification, they are the ones making the offer.
On 14 August 2024 at 6:17 pm Steve Wright said:
Backstage: The issue with 'windfall gains' obscures the point of my opinion piece.
If you read my opinion piece again you'll see I believe there is a place for trauma policies that may pay benefits for conditions that have little or no financial impact.
What I question is advice that favours such policies exclusively, possibly leaving clients exposed to significant financial loss through cost driven underinsurance, when arguably more appropriate solutions exist.
In the end you are the adviser, and it's up to you to decide what advice you believe is suitable.
Let's discuss this offline. You can message me your mobile no confidentially via LinkedIn and I'll give you a call.
On 15 August 2024 at 2:13 pm JPHale said:
@Jan thanks for the comments and checks.
Yes, I agree the client priorities are often not in line with the risks and that's part of the advice discussion. Provide the information fairly and accurately and then have the informed client decide.
The risk likelihood is just a way of presenting this for context and I’m yet to see a client not take life cover because the risk is low, more they want those catastrophic risks covered irrespective of the real risk. Single people with no kids tend to not take life cover if anyone isn't taking it.
More the point clients often understand life cover and maybe trauma cover but they don't know much about disability or medical, and fixing that knowledge gap comes with the risk consideration.
As to the numbers checked, yes ball park from memory and possibly needs an update as they're a few years old. Also a case of different providers have different claims experience, so the is no one easy source of stats for NZ experience.
On 19 August 2024 at 8:58 am Steve Wright said:
According to Stats NZ, in 2022 (latest figures I could find) there were just over 38 700 deaths in NZ. Of those, 6,576 deaths were of working age people (age 20 - 65). 3936 were men and 2634 women. That is 16.9% of all deaths. This was the pure risk of dying during working life in 2022. On 21 August 2024 at 6:14 pm JPHale said:
Thanks Steve. Good to see updates numbers.
However 2022 is possibly not a great year to reset our thinking to as this is the year we got smacked with Covid and the skew of covid deaths is embedded here.
We saw quite a number of working-age deaths in this time period and that does skew things.
The other aspect that's interesting is the number of deaths in NZ remains pretty stable. I recall it was about 34,000 per annum in 2003-2005, meaning we’re living much longer than we were. Which is a good thing.
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