As the industry prepares for the arrival of the new FSA rules in January, the private medical insurance market is anxious to see whether its problems with the draft paper have been ironed out. Lynn Rouse discusses the sector's main concerns
Like the rest of the general insurance industry, the private medical insurance sector is now playing a slightly anxious waiting game. The pens have been laid down, the papers handed in and the door to regulatory consultation on selling and administration has closed. Only in January - when the final rules are published - will PMI providers and intermediaries find out whether their concerns articulated about the draft rules in Consultation Paper 187 have been taken on board.
But the current inability to further influence the Financial Services Authority does not mean that PMI players have taken a fatalistic stance throughout the process, resigning themselves to work within - or exit - the parameters of the incoming statutory regime. The Association of Medical Insurance Intermediaries has been noticeably proactive in its attempts to ensure the PMI voice is heard alongside the concerns of other general insurance camps.
Having conducted a round-table discussion, bringing together the viewpoints of insurers, brokers and trade bodies as well as those of the current voluntary regulator, the AMII, it proceeded to issue an open letter to the FSA calling for several changes to the draft rules (see box). And speaking to PMI insurers and brokers on this subject tends to reveal two primary areas of concern.
The first is that a proposed 21-day renewal notice period is inadequate for PMI and undermines the broker's ability to provide the best advice and service to clients - particularly in the corporate market. The second is that several proposals contained in CP 187 threaten to create information overload, which could effectively dissuade rather than encourage individuals or employees to take up PMI offerings.
On the subject of renewals, AMII has called for a notice period of between 35 and 42 days to replace the 21-day option in CP 187. Anything less than five weeks undermines the PMI intermediary's ability to do their job properly - especially when dealing with corporate schemes, according to Stephen Walker, chief executive of Medical Insurance Services and regulation liaison officer for AMII.
"We need to do a full market search once we have received the terms and review the cover offered to ensure that it is still the best value for each client. We then have to produce a report for the company." He explains that often this will be assessed by the board of directors who, he adds, "are not going to say 'we need to have an urgent meeting to discuss this'. Instead they will wait to raise it at their next meeting. That's why AMII has suggested six weeks would be a more appropriate period".
So how confident is AMII that the FSA will take this recommendation on board, bearing in mind that the regulator has always stressed that there will be no 'special cases'? Mr Walker accepts that the FSA is unlikely to single out the PMI market but adds: "Having said that, the regulator has certainly shown over the last 18 months that it will listen and take views on board if it feels they are valid."
The 21-day period has emerged as an alternative to the General Insurance Standards Council's current subjective requirement of "in good time" and followed a widespread outcry from commercial brokers being handed renewal terms for employers' liability insurance only a day or so before the renewal date. So does the PMI market face equally challenging renewal circumstances?
The answer would appear to be a categoric no. Current practice by PMI insurers could even be held up as a model example.
"The vast majority of insurers provide information between eight and six weeks prior to the renewal date," says Paula Aitken, managing director of intermediary Medicare. "Eight weeks gives us adequate time to do what we need to do but there are one or two who are closer to four weeks." Mr Walker adds: "Some insurers say that it is not possible to offer terms a substantial time prior to the renewal date because things happen between issuing them and the renewal date arriving."
If PMI insurers are already surpassing the proposed 21-day notice period, what would be the harm in having this as a statutory minimum for general insurance across the board? Is there a concern that the present service levels would deteriorate? For example, if insurers are only obliged by law to provide terms three weeks in advance, would they suddenly begin to wait until this deadline to issue them?
"I think that is unlikely to happen, largely because it is in insurers' interests to ensure that business continues to come in through their doors," says Ms Aitken. "It would be a retrograde step to produce renewal information at 21 days and I can't see it happening. The vast majority of PMI insurers have worked very hard to increase their notice periods to what they are now."
But its not just PMI brokers that feel putting a 21-day timeframe on renewals would be wrong. Richard Galley, head of compliance and policy developments at Bupa, would prefer the final rules to keep the "in good time" definition - therefore allowing different insurance sectors to agree on appropriate notice periods for difference classes of cover.
Mr Walker readily admits that AMII's calls for rule amendments amount more to "fine tuning" than a desire for a rigorous overhaul and others in the PMI sector agree. Mr Galley explains that Bupa, in its company response, made only a few recommendations for change regarding CP 187 and is not calling for a return to square one or a major rethink. In fact, brokers and insurers alike are keen to applaud the FSA for its efforts and understanding to date. They recognise that the regulator has been forced onto a very steep learning curve and are particularly glad that the FSA was willing to reverse its original intention - detailed in CP 160 - to classify PMI as a high-risk product.
However, public comments made two weeks ago by Mary Francis, director general of the Association of British Insurers, may prompt a level of unease after she warned more stringent regulation may be in the pipeline (PM, 20 November, p56). In particular, she pointed to the FSA's climbdown over deeming PMI high risk - alongside income protection and critical illness - as having the potential to be reversed and advised against complacency that this issue had been resolved.
Mr Walker himself is expecting changes to the regulatory regime once the framework is in place - but of a very different nature. "Once the framework is up and running and bedded in I hope the FSA will decide to pursue the GISC's route and sectorise the industry further. Although this obviously remains to be seen, I would not be surprised if this happens as logic dictates it will be easier for everybody if regulation is later fine-tuned to suit specific sectors. A one-size-fits-all approach will never be satisfactory."
The second main area of concern for the PMI sector arising from CP 187 is that of quantity over quality when it comes to information provision.
Three specific proposals are highlighted by those working in this field, namely: requirements to provide individual employees covered under company schemes with reams of extra information; record keeping relating to advice given where sales are not realised; and irrelevant detail required under the status disclosure rules.
Ms Aitken points out that, as the draft rules stand, "the size of the reports that I currently send out would likely treble or even quadruple".
Far from stemming from a reluctance to dedicate more time and effort to serving clients, the concern is based on the fact that too much information at best risks alienating potential customers and at worst risks confusing them with inconsistencies (see box). "We are at risk of swamping the end user with information," says Ms Aitken. "To do this would in no way improve our customer service levels when the relationship calls for good, accurate but concise information. I am also worried that this approach will, in particular, put off individual and retail customers."
But it is also of particular concern in the company-paid market. As Bupa states in its response to the FSA on CP 187: "For practical reasons, we do not agree with the proposal for full policy documents to be provided to employees benefiting from the insurance cover. For example, contractual details on how the scheme is administered between Bupa and the employer are not relevant to the individual employee." The response goes on to say that current common practice is sensible - where policy summaries are issued to individuals via their employer. "We disagree that full policy documentation will enhance individual employees' understanding of the contract beyond the requirements of the policy summary." Bupa recommends that the proposal be changed to reflect current practice, with employers informing staff that a copy of the full document is available on request.
Indeed this is exactly what the GISC's PMI new practice requirement - coming into effect on 1 January 2004 - calls for. It states: "There will be no need for members handling such business to contact every single individual employee/beneficiary, but they must make it clear to the firm that there is an expectation on them to pass the information to the employee/beneficiary. It is not sufficient to merely assume that the employer will give the information to any staff members who will be affected."
In its response to CP 187, Bupa also calls for further clarification on the application of record-keeping requirements in relation to contracts that are not concluded due to the customer not proceeding beyond initial enquiry or quotation. The implication being that such record keeping would lead to unnecessary and overwhelming document storage.
Bupa's recommendation is that the rule be amended: "The record should only be retained if the customer concludes the contract."
Matthew Goldsmith, strategy and development manager with Cigna Healthcare, points to a third example in the draft rules that could result in alienating potential customers, if it is not changed. "If I have any problems with CP187, it is the requirement to provide too much detail," he says. "For example, asking brokers to disclose whether they have a holding, direct or indirect, representing more than 10% of the voting rights or of the capital in an insurance undertaking - or vice versa. If you are looking at a person's needs, why do you need to provide that level of detail? Not only is it implying that advice given would be biased by such a shareholding but there is a real danger of switching the customer off rather than switching them on to buying PMI by overcooking everything."
It is also somewhat hard to miss the inherent irony contained in this area of concern. The FSA's desire for brokers and insurers to provide vastly increased levels of product information and documentation comes at the same time that the regulator itself is so publicly streamlining its own processes - gearing everything up to electronic authorisation and reduced paperwork.
Mr Galley sums up his own hopes for the final rule book, directing his closing comments to the regulator: "Give us the flexibility to interpret the rules and provide our own specific guidance where necessary. Monitor the issues that arise out of complaints and if you see problems later emerging, build them in, rather than start regulation at a higher level that could hinder the practicalities of our industry."
What the FSA's response will be to the PMI sectors' recommendations for rule change, we can only wait and see. No doubt January will come soon enough. But as Ms Aitken rightly says: "So far, the process has been very democratically conducted. There will be no-one to blame but ourselves if we have not shouted loudly and persuasively enough."
CP 187: SUMMARY OF THE MAIN AREAS OF CONCERN FROM A PMI PERSPECTIVE
- Chapter 4 - Customers and products: A 21-day notice period for renewals for commercial customers is inadequate for an assessment of the renewal offer to be made by the intermediary and then the customer. An extension to 35-42 days is considered to be more realistic.
- Chapter 5 - Status disclosure: There should be a requirement to state on whose behalf an intermediary is acting (the insurer's or the customer's).
- Chapter 6 - Advising and selling standards: Demands and needs can only be assessed on the information provided by the customer and many customers do not know, initially, what they want from a PMI policy. There is a need for quality not quantity of information. It was felt that there should be a requirement in 4.4.5 G (CP187) to give 'best advice'. There is concern that for some larger organisations, information cannot be sourced from one computer by another based in a different location. This situation needs to be addressed.
- Chapter 7 - Financial promotions and product disclosure: Concerns were raised regarding the volume of information customers are required to receive. Too much information can be as confusing as too little and can produce inconsistency of information provided, resulting in public criticism and Ombudsman involvement.
- Chapter 11 - Complaints: There are concerns regarding vexatious claims and the potential costs involved. FOS case fees should be proportional to the size of firm. Levies should be set at different levels for the different industry sectors to reflect their individual claims histories.
Source: The Association of Medical Insurance Intermediaries.
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