Col Fullagar looks at the recent changes to heart attack definitions and considers possible impacts on the financial advice process.
Trauma insurance was conceived in South Africa around 1983 and from there it was transported to Australia, first appearing in the risk insurance market here in the late 1980s.
Initial take-up rates were low as advisers came to grips with whether the purpose of the product was to address a real need or whether it was simply a passing fad.
The former prevailed: the purpose was ratified and trauma insurance started playing an increasingly important role in the risk insurance advice process.
It is well documented that initially policies only covered a small number of insured events, typically the main four of heart attack, stroke, cancer and heart surgery, together with several others such as paralysis, major head trauma and multiple sclerosis.
Over the years, however, many more insured events have been added, the definitions of existing insured events have been altered and partial payments have been introduced.
Today’s policies would be considered materially different to those of 25 years ago.
To the extent that policies are so different to those first conceived, it is valid to ask whether the contracts of today are still serving the same purpose or whether the positioning of the product has altered.
The question has fundamental importance, because if financial advice is based on the original purpose – but the insurance solution has moved on from that – then either the advice or the product has to change.
There are other ramifications as well, most obviously:
- If the purpose has changed then so must the basis of advice quantification within the recommendation; and
- If contractual changes lead to an increase in the claims experience, this may impact on premium rates and the insured’s ability to afford the necessary level of cover.
The question is timely given recent changes to one of the key trauma-insured event definitions, which arguably could be the catalyst for a review.
The definition in question is for the insured-event heart attack.
The original purpose
The question being considered is whether the purpose of today’s trauma insurance policies is the same as that which led to the initial development of these contracts.
The immediate temptation is to respond that policies are absolutely still serving the same purpose: ie, they provide for the payment of a lump sum when an insured suffers a major medical trauma such that the financial exposure associated with the cost of medical treatment and rehabilitation, together with the cost of required lifestyle changes, can be mitigated.
There is merit, however, in digging deeper because the financial advice process itself goes deeper in how it approaches the provision of a financial solution.
From time to time, product managers within insurance companies will be asked the question, “What constitutes a trauma?”; ie, what criteria do you use to assess whether or not a particular event warrants being included in a trauma insurance policy?
The cynical answer is of course: “A trauma is when a competitor sells more policies than us so the criteria is keeping up with what others do.”
Moving past that and pressing the point with the product manager may result in an initial blank stare followed by, “Ah yes, well the event is…ah…traumatic.”
But how is “traumatic” assessed? For example, any self-respecting man will tell you how highly the male flu virus rates on the trauma scale but, as yet, it has not found its way into any trauma policies.
The answer lies in the initial product design – and going back in time provides the necessary insight.
Term life insurance provides protection against the financial needs arising when death is certain; ie, the life insured is either dead or within 12 months of dying.
Term insurance serves this purpose well, so trauma insurance did not need to duplicate it.
Trauma insurance policies were thus designed to provide financial protection if a serious medical event occurred:
- Which might lead to death, but death was by no means certain; and/or
- Which carried with it a high medical and rehabilitation cost; and
- Which gave rise to a level of psychological or physical impact that could well lead to the life insured seeking a change of lifestyle.
Effectively this was the mission statement for the product, and it was the presence of this philosophical guiding light that provided the initial clear and consistent focus.
Having established the purpose of the product, the next step was to identify what conditions would be covered and, as indicated, initially it was cancer, heart attack, stroke and the like.
It was obvious that these terms covered the full range of severity from very slight to very severe; therefore in order to have the policy conditions aligned with the policy purpose it was necessary to have definitions of insured events such that claims would only be paid if the event was of the requisite severity.
The benchmark criteria generically used was to define the insured events such that they approximated a five-year survival rate for insureds of around 80 per cent.
Thus the initial definition of heart attack was almost universally consistent with the following:
“Heart attack is defined as the diagnosis of the death of a portion of the life-insured’s heart muscle as a result of inadequate blood supply. The diagnosis will be based on:
- A history of typical chest pain;
- New electrocardiography (ECG) changes;
- Elevation of cardiac enzymes above standard laboratory levels of normal”
(Norwich, Critical Illness Security Plan, 1992).”
By requiring elevation of enzymes above normal levels, the definition ensured that only indicatively serious heart attacks were covered.
Claim proofs similarly ensured that only heart attacks at the appropriate level of severity were covered; the need for chest pain meant that so-called silent infarctions were excluded, as were minor technical heart attacks associated with surgical procedures.
The relative simplicity of the definition enabled the financial adviser to explain to the client what was and was not covered in a way that could reasonably be understood, which in turn facilitated clarity of contractual intent.
The consistent focus of definitions enabled the financial adviser, by undertaking research, to quantify the need and provide advice accordingly – and because pricing was aligned with a product that compensated for a genuine loss, appropriate levels of cover were affordable.
The purpose of the product, the product itself and the advice process were in alignment.
The current position
In the years since the 1992 definition was drafted, a number of social and market forces have worked together to create a subtle but critical shift which can best be appreciated by considering recent changes to the definition of heart attack in some trauma insurance policies.
The new 2012 definition is along the lines of:
“Heart attack means myocardial infarction evidenced by the detection of the rise and/or fall of cardiac biomarkers with at least one value above the 99th percentile of the upper reference range together with one of the following:
- Signs and symptoms of ischaemia consistent with myocardial infarction; or
- ECG changes indicative of new ischaemia; or
- Development of pathological Q waves; or
- Imaging evidence of new loss of viable myocardium or new regional wall motion abnormality.
If the above tests are inconclusive, other appropriate and medically recognised tests will be considered.”
The change in definition has an impact in each of the areas referred to previously:
Extent of insurance cover
The last 25 years has seen significant changes in the testing regime for heart attacks.
The introduction of imaging in order to identify a heart attack did not exist when the product was first introduced.
Also, as medical testing became increasingly sophisticated and precise, heart attack indicators such as Troponin were able to be identified at much lower levels than was previously the case.
Whereas previously for a claim to ensue, enzymes needed to be above laboratory standard levels – for example, Troponin elevation to 600ng/L (in terms of older measures) – the criteria reflected in the 2012 definition is aligned to a detectable elevation which is as low as 14 ng/L.
Whilst the number of severe heart attacks was decreasing by virtue of improved health standards, the number of statistical heart attacks was increasing as a result of changes in the testing regime.
Because the 2012 definition focussed on the statistical rather than the severe, it became possible for very minor events (for example, arising from extreme exertion) to technically satisfy the definition whilst clearly falling outside the original purpose of the product.
Reduction in insurance claim proofs
Competitive pressure has led to a gradual but obvious reduction in the proofs necessary to generate a claim payment.
In the1992 definition, ‘death of…a portion of heart muscle’ required proof by each of chest pain, ECG changes and raised cardiac enzymes.
By 2012 only one of these was necessary. For example, by not requiring a history of chest pain, the definition now potentially opens the door for silent infarcts and peri-procedural heart attacks; ie, relatively innocuous heart attacks occurring during surgical procedures.
Once again, the number of claims potentially being paid increases; however, the increase is not aligned to the original policy purpose.
Whilst previously an adviser might reasonably be able to refer to the definition of heart attack and understand and assist the client to understand what was and was not covered, this is clearly no longer necessarily the case.
Advisers should not, however, feel alone if they experience difficulty coming to grips with the new definition; insurers also in some cases have been forced to attend technical workshops in order to appreciate the whys and wherefores of the changes.
Benefit amount recommendation
The above change in the definition of heart attack means that it is no longer appropriate to simply represent these contracts as covering the needs that arise if an insured suffers a major medical trauma.
How in fact the contractual purpose could be represented is challenging: if the previous representation is made, clients may view with cynicism the payment of a large benefit amount for a very small heart attack.
If, however, the contract is represented as covering the financial impact of a minor heart attack through to a major heart attack, the quantification of the benefit amount becomes difficult.
If a simplistic approach is taken, ie, “what the client can afford?”, this may run foul of the requirement to know the client and provide tailored advice.
Product pricing and affordability
The net effect of the 2012 definition is a lowering of the bar as to what constitutes a heart attack within the confines of a trauma insurance policy.
As a result, more claims will be paid and claims costs will increase under the heading of heart attack, with estimates putting the increase at up to 65 per cent.
The impact on product pricing is not inconsequential, with estimates placing the increase to maintain existing profitability levels at between 10 and 15 per cent for males and up to 5 per cent for females.
The concern is that this will put premiums out of range for some clients, such that the product either cannot be afforded or cannot be afforded in sufficient amounts to cover what is needed to protect against the financial impact of a severe heart attack.
If the changes flow onto existing policies by virtue of the guarantee of upgrade, overall premiums will inevitably increase, leading to higher attrition rates.
The way forward
A review of the above impacts would suggest that the purpose of the product, the product itself and the advice process are no longer in alignment.
This article has only focussed on one area of change in trauma insurance since it was introduced 25 years ago; ie, the definition of heart attack. There are of course many others which potentially impact on the advice process.
The way forward is neither obvious nor easy.
Should there be a return to insured-event definitions that have a consistent and quantifiable standard, such that advisers are better able to represent the contract to clients?
Should the changes be embraced and more work done on identifying and solving the issues arising?
The issues need to be recognised, considered and debated so that the quality, clarity and safety of advice are maintained.
By the way, why hasn’t the male flu virus been installed as a trauma-insured event?
(The assistance of Geetha Singam, actuarial analyst, life – research and development division, Munich Re, Australia in researching this article is gratefully acknowledged).
Col Fullagar is principal of Integrity Resolutions Pty Ltd.