From the cradle to the grave: the cost of insuring for good healthcare

The OFT has told insurance firms to get their policies into shape.

Most of us know a good motor insurance policy when we see one, or think we do at any rate, and the beauty of cheap term assurance which pays out if you die within the life of the policy is that the policy is easy to understand and the premiums are mainly a function of your age and gender.

Medical insurance is quite a different story. Policyholders know they are at the mercy of medical science as well as insurance salesmen, and either know they are taking a great deal on trust when they buy them, or worse still are unaware until they need to make a claim.

That is why the Office of Fair Trading this week has suggested the insurance industry through its professional body the ABI should get to work and draw up some simple standard policies in which "core terms and benefits and key features are clearly and simply described".

These standard policies could be sold off the peg or at least be used as a benchmark to help customers evaluate those more complicated products individual insurers want to offer.

The OFT wants providers to stop offering moratoria, which allow policyholders to buy policies without having to make a medical declaration, but expose them to the risk that providers may not pay out if it turns out that policy- holders already had the condition they claim for. Such exclusions may not come to light until a claim is made, making it impossible to judge whether a particular policy offers value for money, says the report.

Insurance salesmen must also do more to warn policyholders that medical costs are rising consistently faster than earnings or the cost of living, and premiums for private medical insurance policies will have to escalate in step with costs.

Most insurance companies, in an attempt to contain costs and hold down premiums, also stipulate the care and treatment which anyone who makes a claim shall receive. This carries the danger of multiple standards developing which could have an unfair impact on some policyholders, and the OFT wants to see a common framework of care practices drawn up.

Permanent health insurance is also fraught with risks that purchasers will not be fully aware of what crucial definitions like "total disability" means, and how the policies and benefits interact with state benefits and employers' sick-pay schemes. There is a risk that customers will be tempted to overinsure and then find their pay-outs are related to much reduced expectations.

Customers who buy critical illness insurance cover which pays out if they are diagnosed as suffering from one or more of a range of serious illnesses which make them unable to work, may also not be aware that triggering a claim will make it difficult if not impossible to get life assurance cover at a time when they may well soon need it.

Last but not least the OFT agrees that the selling of long-term care policies should be subject to some sort of regulation. Long-term care policies are expensive and most people are too poor to pay the premiums or well enough off not to need the policies. But local authorities can now claim family homes to pay for long-term care, and new partnership policies are in the pipeline, which will literally pay for residential or nursing care for the elderly infirm until the state is willing to step in, and in the process protect the average family home from being sold to pay for care.

The pledge of state help should cut premiums and promote sales, but this is an area where benchmark products are clearly needed, so that people at a vulnerable stage in their lives do not make mistakes and buy policies they cannot afford with frills they do not need. The OFT is particularly sceptical of policies that focus on minor details like helplines or care counselling. It also calls for a code of minimum standards of care, and a clear statement of what happens if old people are unable to keep up the payments on pay-as-you go policies.

Legal & General, which has gone into medical insurance in a big way, clearly feels that its standard fact-find technique similar to that employed in selling pensions and investments will cope with many of the OFT's concerns, but the general response from insurers and specialist providers like Bupa and PPP Healthcare has been very encouraging, which suggests a relatively quick and easy ride for changes which could reduce some of the uncertainty (if not the cost) of insuring for things the average citizen assumed until recently would be free to those in need.