Effectiveness of oral disclosure rule in the sale of critical illness cover: second stage findings

Transcription

1 Consumer Research 82 Financial Services Authority Effectiveness of oral disclosure rule in the sale of critical illness cover: second stage findings Prepared for the Financial Services Authority by TNS-BMRB June 2010

2 Content Research acknowledgement Executive Summary Context Consumer understanding The adviser s role Qualitative findings Introduction and background Research objectives Qualitative research Consumer understanding Information only versus advised sale Documentation Quantitative research Research design Consumer understanding The adviser s role Written documentation Technical appendix of 85

3 Research acknowledgement Research acknowledgement This research report forms part of the wider post-implementation review (PIR) of the FSA s new Insurance Conduct of Business sourcebook (ICOBS) which came into effect in January The research investigated the extent to which consumers understood the cover provided by their Critical Illness Cover, how they obtained information on the product and the role played by oral disclosure by sales people and advisers in consumer s knowledge of the product. The FSA has not been able to draw any conclusions on the effectiveness of oral disclosure because other work undertaken as part of the PIR indicted that many firms have not appropriately implemented the requirements. The conclusions drawn by the FSA on firms implementation of the ICOBS oral disclosure requirements is based on an overall assessment of the different strands of the review, of which this survey is just one element. The review included a call listening exercise to assess the extent to which firms selling CIC are meeting ICOBS requirements which found that overall compliance with ICOBS was unacceptable with all the eleven firms in the sample failing on some or most of our key requirements in a significant proportion of the calls assessed. Other elements of the wider ICOBS PIR examined: 1. More principles-based regulation: its effect on outcomes for consumers; and 2. The Private Medical Insurance market: the effect of removing detailed rules on outcomes for consumer This consumer research was carried out on behalf of the FSA by TNS-BMRB and was lead by Anthony Allen. The FSA policy leads were Twewah Marfo and Lanze Gardiner, and the research manager was Errol Walker. Copies of the report can be downloaded from the publications section of the FSA website 2 of 85

4 Executive Summary 1. Executive Summary 1.1 Context The FSA published a new Insurance Conduct of Business sourcebook (ICOBS) in December 2007 following a review of the insurance selling and administration regime (ICOB Review). ICOBS came into effect on 6 January 2008 with a six month transitional period for firms to comply with the new regime. The transition period ended on 5 July The target outcomes of the ICOBS regime for non-investment insurance are that where consumers buy insurance on a non-advised basis, they receive sufficient information to make an informed decision, and firms selling the insurance do not make inappropriate sales; where consumers buy insurance on an advised basis they are recommended suitable policies that meet their demands and needs; consumers understand the key features of their policy, including significant exclusions; and consumers claiming on their insurance policies have their claims dealt with promptly and fairly. The main focus of this two-phased research is to evaluate the extent to which the new oral disclosure requirements introduced by ICOBS are effective at improving the consumer understanding of Critical Illness Cover (CIC) post-purchase. Consumer research, indicates that consumers place considerable reliance on oral information concerning financial products given as part of the sales process. However, although there is a great deal of talking during sales about protection products, the quality of any disclosure resulting from these discussions can be very variable. A key objective of the new oral disclosure requirements is to improve quality by, among other things, specifying the key areas on which oral disclosure must focus. ICOBS introduced new oral disclosure requirements for firms selling protection products, to ensure that consumers can make an informed decision. The rule requires that, if a firm provides information orally during a sales dialogue with a consumer on a main characteristic of a policy, it must do so for all the policy s main characteristics. The rule also requires that firms take reasonable steps to ensure that the oral information is sufficient to enable the consumer to make an informed 3 of 85

5 Executive Summary decision on the basis of that information, without overloading the consumer or obscuring other parts of the information. ICOBS provides guidance on what should be included as a main characteristic of a policy. This includes the significant benefits, exclusions, limitations, policy duration and price information. Guidance is also provided on which exclusions or limitations are significant. Under ICOBS 4.2.4, a firm is also required to orally disclose the limits of the service it is providing, if it anticipates providing or already provides information on any main characteristic of a policy orally during a non-advised sale. So, where a sale does not involve a personal recommendation, a firm must take reasonable steps to ensure a consumer understands they are responsible for deciding whether a policy meets their demands and needs, and this includes explaining the consumer s responsibility orally. Phase one of the research, undertaken in 2008, provided the baseline against which the effectiveness of the new requirements could be evaluated using data obtained from the phase two post implementation survey undertaken 12 months later. The phase one survey results were published in April 2009 as part of the FSA Consumer Research series 1. The results of the phase two stage of the research undertaken in October 2009 are set out here in this report. As with the baseline stage of the research, phase two of the research consisted of two components a series of qualitative depth interviews followed by a quantitative survey. The qualitative research comprised 16 interviews with consumers who had purchased a CIC policy between March and May Qualitative fieldwork took place between August and October 2009 using face-to-face depth interviews. In both phases one and two the quantitative questionnaire was informed by the results of the qualitative research, and the qualitative interviews in phase two further explored issues raised by the baseline quantitative survey in more detail. The quantitative stage comprised 515 interviews with consumers who had purchased CIC between March and May 2009 from one of several major insurance providers. Interviews were conducted in October CR 77 - Post implementation review of ICOBS: Oral Disclosure Rule in sales of Critical Illness Cover baseline survey 4 of 85

6 Executive Summary 1.2 Consumer understanding The post-implementation results showed no improvement in consumer understanding since the baseline stage. Most consumers still had limited understanding of the policy they had taken out, with key areas of the policy being misunderstood. Regardless of this, the majority of policyholders believed they understood their CIC product well overall (84%) and were confident about the coverage it offered (80%). However, misunderstandings that were revealed in the baseline survey continued to be apparent at the time of the post-implementation survey. The most serious inaccuracies related to the extent of coverage. Seven in ten (72%) consumers believed that their policy would cover them for all types and severity of at least one of the main illnesses/conditions covered by CIC policies, when typically CIC policies have severity thresholds for each of these conditions. Although recall may be a factor in this uncertainty, it is worrying that so many consumers have such limited understanding of the scope of the coverage. Most (70%) believed that their policy covered them for any illness which meant they could not work, suggesting a widespread conflation of CIC with income protection products amongst consumers. There was a tendency not to understand disclosure obligations: three quarters (77%) of consumers believed their insurance company would write to their GP for their medical records whilst over half (56%) thought they only needed to update their insurer about changes to circumstances in the event of a claim. One area which most consumers claimed to understand well was the cost or premiums that they had to pay for their policy (93% felt they understood this aspect well). However when asked what types of premium they had (i.e. fixed or reviewable), three in ten (30%) were unsure, which means there has been no change in understanding since the baseline survey. Many did not know how they would be paid in the event of a claim. As in the baseline survey, one quarter (23%) believed they would receive regular payments as opposed to a lump sum whilst a further quarter of consumers (26%) were unsure. So in total, half of the respondents did not understand this key aspect of their policy. 5 of 85

7 Executive Summary One of the main objectives of the oral disclosure rule is to improve consumer understanding of the CIC product they have taken out. However, there is no evidence from this latest survey to suggest that consumers have a greater understanding of the policy since the rule became effective in This may in part be due to poor implementation by firms and in part due to factors such as the complexity of the product. There is a further issue that consumers generally fail to engage actively with the sales process, and tend to rely wholly on the adviser to give them accurate advice. 1.3 The adviser s role Advisers play a pivotal role in the sale of CIC. As seen in the baseline, the adviser is trusted to recommend the best product for consumers eight in ten (84%) consumers agreed that they relied on the adviser to do this. Seven in ten (71%) also agreed that the adviser s recommendation was one of the reasons for taking out the cover. This consumer belief in the impartiality of the adviser is confirmed by the fact that three quarters (76%) of policyholders disagreed that the adviser was more interested in selling them the policy than providing them with the relevant information. Most respondents recalled being told about some of the features of their product almost all consumers (95%) remembered that the main features of the policy were orally explained to them. There was also some evidence to suggest that oral disclosure had improved in relation to certain features being explained more thoroughly. The proportion of consumers who remembered being told about the cooling off period increased from 87% in the baseline survey to 94% in the second survey. In addition, a greater proportion of those consumers aware that they paid reviewable premiums said that the adviser had explained the circumstances under which their reviewable premiums might increase compared with the baseline survey (from 57% to 81%). Although one of the key findings of the post-implementation survey is that the coverage of the policy is still widely misunderstood by consumers, a greater proportion of consumers said the adviser was a source of information about the 6 of 85

8 Executive Summary coverage, compared with the baseline survey (from 40% to 50% of consumers). However it should be noted that this is not a statistically significant increase. It should also be noted that while consumers recalled that key features of the policy were orally explained to them, the findings of the monitoring work undertaken by the FSA for telephone sales of CIC suggest only limited implementation of the ICOBS oral disclosure requirements. While the survey findings may be a reflection of imperfect consumer recall, the findings of the call listening exercise is consistent with the widespread misunderstanding by consumers on many key aspects of their policy seen in the survey. 1.4 Qualitative findings The qualitative research conducted alongside the quantitative stage showed a similar picture. Overall, most consumers claimed to have a good understanding of their product. However, when questioned it was clear that knowledge of the policy was varied and in many cases nowhere near as extensive as assumed. Most consumers recognised that their CIC policy includes cover for four main health conditions cancer, HIV/AIDS, stroke and heart attack. However, it was not understood that the policy does not cover all variants of these conditions, and only at specified levels of severity. Also, although there was a better understanding of what the policy exclusions were when prompted, understanding of this area was still low. While consumers recognised that there would be certain conditions that would need to be fulfilled in order to make a claim on their policy (providing documents, a medical examination, etc) they were not aware of the timescales for notifying the insurer and for making a claim. The area where consumers were most knowledgeable was that a claim would be paid as a lump sum, although there were some exceptions to this. Although all consumers in the sample were involved in advised sales, very few realised this or were aware of the distinction between advised and non-advised sales. Adding to this confusion, the quantitative stage also revealed that some consumers recalled that advisers said they would be providing information but proceeded to make a recommendation. 7 of 85

9 Executive Summary There was a low recall of the documentation relating to the sale (there was often confusion between this and other policy documents such as the main policy documents). Policy documentation that was received after the sale was generally not read, and consumers showed little interest in reading it. 8 of 85

10 Introduction and background 2. Introduction and background This report builds on previous research carried out by the Financial Services Authority (FSA) into the conduct of business regime for the sale and administration of non-investment insurance products. This research was commissioned to evaluate the effectiveness of the new oral disclosure requirement in sales of critical illness cover (CIC) and this report sets out the results of the second phase of this research which collected data from consumers who had purchased CIC after the ICOBS regime had been in place for several months. The baseline study which forms phase one of this research was published in April 2009 and provides the basis for comparing consumer understanding pre and post ICOBS. What is Critical Illness Cover (CIC)? CIC is a long-term insurance policy traditionally designed to pay a lump sum (although some policies now offer the option of taking the benefit as monthly payments) on the diagnosis of certain life-threatening or debilitating but not necessarily fatal conditions, such as heart attack or stroke, cancer, multiple sclerosis, loss of limbs, etc. CIC can either be purchased on its own as a standalone policy or as an add-on or rider to another type of insurance, such as a term assurance or other life policy or a mortgage payment protection policy. CIC rider sales made up around 85% of new CIC sales in 2007 and 93% in Stand-alone policies therefore make up a very small proportion of the market. Most CIC rider policies are sold as an add-on to term assurance plans and are either mortgage-linked or non-mortgage-linked, such as protection term assurance. Historically, mortgage-linked CIC sales have made up the largest proportion of CIC sales. However, there has been a steady decline in the proportion of the market accounted for by mortgage-linked CIC sales over the last six years. The new oral disclosure requirement came into force after the FSA had carried out a review into the effectiveness of the Insurance Conduct of Business Sourcebook 2 Critical Illness Cover, Finance Intelligence, February 2009, Mintel International Group Ltd 9 of 85

11 Introduction and background (ICOBS) in achieving the target outcomes of the regime for non-investment insurance. The FSA published a new Insurance Conduct of Business Sourcebook in December 2007 following this review. The review found that purchasers of protection products, such as CIC, relied more heavily on oral than written disclosures and suggested that the complexity of these products required additional oral disclosures. It introduced a number of new rules and guidance aimed at improving consumer outcomes by targeting the key risks identified in the review. The new oral disclosure rules were designed to benefit consumers buying protection products by ensuring that they received sufficient information, in a comprehensible form and in good time to make an informed purchasing decision. Specifically, these included ICOBS 6.4.2, which required that if a firm provided oral information during a sales dialogue with a consumer on one main characteristic of a policy, it had to do so for all of the policy s main characteristics. The rule also required firms to take reasonable steps to ensure that the oral information was sufficient to enable the consumer to make an informed decision on the basis of that information, without overloading the consumer or obscuring other parts of the information. ICOBS provided guidance on what should be included as a main characteristic of a policy and the significant benefits, exclusions, limitations, policy duration and price information. Guidance was also provided on which exclusions or limitations were significant. ICOBS came into effect on 6 January 2008 with a six month transitional period for firms to comply with the new regime. The transition period ended on 5 July Research objectives The key issue that the research aimed to address is: Where oral disclosure in line with the new ICOBS requirements has taken place, what is the impact on consumers in terms of: 10 of 85

12 Introduction and background i) improving understanding of significant benefits, exclusions, limitations and factors that may have an adverse effect on the benefits payable under the policy ii) enabling consumers to form realistic expectations of the scope and limitations of the cover The main focus of the research was the evaluation of the extent to which oral disclosure, where appropriately implemented, is effective at improving consumer understanding of CIC post-purchase. A survey was conducted in October 2008, which established a baseline of consumers understanding of policy. This was preceded by qualitative research, which helped to inform the design of the quantitative questionnaire and explore the sales process in more detail. A combined report of the findings was published by the FSA in April The baseline survey showed a clear gap between consumers perceived understanding of CIC and their actual understanding of the product. There were misunderstandings across many aspects of the product, including the illnesses covered and not covered, the reasons claims might be rejected, payment expectations and premiums. A second survey was undertaken in October 2009 to measure any shift in consumer understanding of CIC as a result of the new oral disclosure rule. This second survey was conducted with consumers who had bought their policy after the new ICOBS transition period had ended. Additional work has been undertaken outside of this project to supplement understanding of how firms are implementing the oral disclosure requirements in sales of critical illness cover 4. 3 CR 77 - Post implementation review of ICOBS: Oral Disclosure Rule in sales of Critical Illness Cover baseline survey 4 The FSA carried out a call listening exercise to assess the extent to which firms selling CIC are meeting ICOBS requirements and found that the overall compliance with ICOBS was unacceptable with all firms failing on some or most of its key requirements in a significant proportion of the calls assessed. Detailed results of the CIC calling listening exercise will be published in the FSA s report of it Post-implementation review of ICOBS. 11 of 85

13 Qualitative research 3. Qualitative research The qualitative research involved 16 interviews with consumers who had purchased a CIC policy between March and May They were recruited from samples provided by four of the main insurance providers and were selected to ensure a balanced mix according to the following criteria: Policy type a mixture of standalone and rider CIC policies 5 Purchase type intermediary (e.g. through an Independent Financial Adviser) or direct (from the insurer s own sales force or tied agents) Channel of sale telephone or face to face Level of financial sophistication of the consumer (higher and lower levels of financial sophistication) Geographical spread All the respondents were involved in advised sales. They had been advised that the product purchased was the one that best suited their demands and needs. 3.1 Consumer understanding Most consumers tended to have a low level of understanding and awareness of CIC prior to the sale and were initially interested in purchasing another product, usually a mortgage or a loan. Nevertheless, they had an underlying concern about how they would manage financially if they became ill. In order to explore consumer understanding of the CIC policy purchased, a series of questions were asked to test their knowledge of various aspects of the CIC policy. This included questions about: the health conditions covered, the levels of severity that would be covered, exclusions, factors that might affect their claim, and how 5 Most of the respondents interviewed had taken out rider policies. These are more common than standalone policies and this difference is reflected in the sample structure (see sample profile). Rider policies involve the purchase of more than one financial product at a time, such as a mortgage or a loan and CIC. 12 of 85

14 Qualitative research payment would be received in the event of a claim. Further details of the quiz may be found in the topic guide appended to the report. Overall, most consumers thought that they had a good level of understanding of their CIC policy, that it was appropriate for their needs and suitable for them. However, although consumers did understand some areas of their policy fairly well (especially around payment details) they had a poorer understanding of other areas such as the types and severities of conditions covered, factors which may affect a claim, and exclusions. Consumers were almost wholly reliant on the sales person s explanations they tended not to read the written documentation and also asked very few questions about their policy at the point of sale: their purchase was often unplanned and so no questions had been prepared consumers trusted the salespeople to sell them the most appropriate CIC policy and weren t necessarily confident enough to ask questions questions that were asked tended to focus exclusively on premium payments Most consumers thought the CIC policy covered a wide range of health conditions, with cancer, HIV / AIDS, stroke and heart attack being the most frequently mentioned. Many thought that they would be covered for any condition (or accident) that made them ill enough to be unable to work a finding reflected by the quantitative study. Critical illness is only covered if you can t work. (Standalone, Higher financial sophistication, Insurer) Critical illness is illness where you are about to die. (Standalone, Lower financial sophistication, Insurer) Although most consumers recalled the salesperson discussing the conditions that were covered, and did ask what conditions they were covered for, this was usually recalled as being discussed in terms of the four main conditions mentioned above. 13 of 85

15 Qualitative research Most did not recall the discussion progressing onto the other conditions that might be covered by their CIC policy. I think it may cover MS, I m not absolutely sure, to be quite honest without looking at the policy right now I couldn t give the information off the top of my head. (Rider, Lower financial sophistication, Insurer) Consumers were quizzed on the types and severities of each particular health condition they thought they were covered for. Most thought that the more severe conditions are covered (e.g. stroke with permanent symptoms, malignant cancer and major heart attack). There was an assumption that the more severe conditions would be covered just because consumers believed that s what the policy was designed to do. The following misunderstandings emerged from the quiz: Consumers often thought that all types and severities of cancer were covered, including cancers of intermediate and low severity They often believed that they were covered for cancers which typically are excluded from CIC policies: borderline malignancy, cancer in situ, and non invasive: I took a very blanket view of cancer. You know, not realising that there are very specific variations of the disease that they might not, you know, cover. (Standalone, Higher financial sophistication, Intermediary) I think I d be covered for borderline malignancy. (Standalone, Higher financial sophistication, Intermediary) Cancer in situ I don t know what this means. (Standalone, Lower financial sophistication, Insurer) He (the salesperson) just said I was covered for cancer, he never mentioned the different types. (Standalone, Higher financial sophistication, Insurer) 14 of 85

16 Qualitative research Many consumers incorrectly thought they would be covered for sexually transmitted HIV and instances of HIV where they were infected outside the UK Although the responses tended to be similar regardless of financial sophistication, those of lower financial sophistication were more likely to over-estimate their level of cover. Of all the aspects of CIC discussed, understanding and knowledge tended to be highest around payment details. For example, consumers were often able to discuss the term, premium and level of payout in detail compared with other policy areas. However, consumers could sometimes confuse CIC with other policies they had purchased: I may have these two policies confused because this is a critical and that s a life, I m not sure, to be honest I m confused now. (Rider, Lower financial sophistication, Insurer) Consumer awareness of CIC exclusions was low, with many consumers not even realising that there were exclusions to their policy. The reason given for this lack of knowledge was that they did not recall exclusions being mentioned by the salesperson. Once prompted with a possible list of exclusions, consumers were able to identify the following as being likely exclusions to their CIC policy, although this was generally based on assumption: conditions arising due to misuse of alcohol and drugs cases where treatment was refused failing to notify insurer about pre existing conditions conditions arising due to negligence or self inflicted conditions failure to notify provider about changes to health To a lesser extent the following were also thought to be likely CIC policy exclusions: not declaring a medical history or family history of a condition conditions relating to living outside of the EU involvement in hazardous sports or pastimes 15 of 85

17 Qualitative research Well it (family history) wasn t something that we spoke about and as far as I know, that wouldn t affect your claim. (Standalone, Higher financial sophistication, Intermediary) I don t think that you would be covered for cases where you inflict things on yourself. (Standalone, Lower financial sophistication, Insurer) There are a number of conditions that must be fulfilled in order for a claim to be successful. Most were correctly recalled although there was limited understanding of the following conditions which characterise many policies: notification of an illness or condition must be received by the policy issuer within six months claim forms need to be completed and received by the policy issuer within 28 days of notification Consumers in this study bought a CIC policy either as a rider policy to another financial product, or as a standalone purchase. In the case of rider policies, none of them had considered purchasing a CIC policy before the transaction and had little, if any, prior knowledge of the product. Most expressed a concern about their finances in the event of an illness, although this was an issue raised by the salesperson rather than the consumers themselves. Based on the information and advice given to them by the salesperson they believed that they had bought a product that was suitable for their needs; they trusted the salesperson to sell them a product that was suitable for them. When we were talking about CIC the salesperson said God forbid anything happens to you tomorrow he made me worried about who would pay the bills. (Standalone, Higher financial sophistication, Intermediary) While most consumers have some recall of the detail of their CIC policies it is clear that they have little overall understanding of the product they have bought. While they recognise that the policy covers certain health conditions cancer, HIV/AIDS, 16 of 85

18 Qualitative research stroke and heart attack they are not aware that the policy does not cover all variants of these conditions and only specified levels of severity. Spontaneous recall of the policy exclusions was low; on prompting they had a better idea of what the policy exclusions were likely to be. While most recognised that there would be certain conditions that would need to be fulfilled in order to make a claim on their policy (providing documents, a medical examination, etc) they were generally not aware of timescales for notifying the insurer and for making a claim. The one area where consumers were most knowledgeable was that a claim would be paid as a lump sum, although there were some exceptions to this. Generally, levels of consumer understanding did not seem to have changed in comparison with the previous wave of qualitative research. 3.2 Information only versus advised sale Although all consumers sampled for the research had been identified by the firms who provided the data as having purchased their CIC following an advised sale, they were asked if they were involved in an information only sale or an advised sale, in order to assess their understanding of the distinction in practice. The regulatory requirements state that in sales involving a personal recommendation, the underlying reasons for any advice given to consumers about a policy must be provided. These will normally be detailed in a demands and needs statement that sets out the reasons for the advice as well as describing any demands and needs that are not met. In the case of information only sales, firms should ensure that the consumer understands they are being provided with information and that the consumer is responsible for deciding whether a policy meets their demands and needs. Overall, most consumers did not recognise that their purchase was an advised sale. Even when the difference between advised and information only sales was explained to consumers during the interview, understanding of the difference remained low. It is clear that in some cases it was not made sufficiently clear to the consumer that a recommendation had been made by the adviser and the basis for that recommendation. 17 of 85

19 Qualitative research The general lack of understanding of the difference between advised and nonadvised sales appeared to occur for the following reasons: Most consumers were unaware that there were different types of sales process Consumers tended to be more focused on aspects of the CIC product, such as payment details, rather than the sales process The significance of the questions asked of them by the salesperson in relation to the their demands and needs were not understood, even though consumers recalled being asked the questions There was a low recall of the documentation relating to the sale (there was often confusion between this and other policy documents such as the main policy documents) 3.3 Documentation Only a small number of consumers said they had read the policy documents; those who had read them had usually only browsed through the policy document rather than examining it in detail. For most, the documents remained un-read. The reasons for not reading the policy documents were: Many felt they had been informed of all the relevant details about their policy during the sale, and so they did not need to read the document The length of the document and the complexity of the language were off putting and acted as an obstacle to reading I haven t read it through as thoroughly as maybe I should there s a lot of areas that I didn t even think to cover in the interview. (Standalone, Higher financial sophistication, Intermediary) All I really read was the bit where they talked about total monthly payments, how much they re going to pay out. (Rider, Higher financial sophistication, Intermediary) 18 of 85

20 Quantitative research 4. Quantitative research The quantitative research comprised of two surveys: a baseline survey conducted in October and a second wave survey conducted in October The rationale behind this two-stage approach was to measure any shift in understanding preimplementation and post-implementation of the oral disclosure rules. 4.1 Research design The second quantitative survey adhered to the same design as the baseline survey, in order to allow comparability between the two. As in the baseline wave, telephone interviews were conducted with consumers who had purchased their CIC policy around six months previously. The baseline survey was conducted in October The second survey was conducted in October In the baseline survey, 500 interviews were conducted with consumers who had purchased a CIC policy between March and May In the second survey, 515 interviews were conducted with those who had purchased their policy between March and May The sample was provided by a number of different insurance providers and the same providers were used in both phases one and two. The sample was stratified on the basis of: provider purchase channel via an intermediary (i.e. through an Independent Financial Adviser) or direct (i.e. from the insurer s own sales force or tied agents) type of policy standalone or rider 6 Although the first survey was conducted with consumers who had bought their CIC policy between March and May i.e. within the ICOBS transition period. - it was anticipated that most firms would not have implemented the changes to their sales processes required by ICOBS by this time. It could therefore still form a satisfactory baseline against which to measure the second survey results. 19 of 85

21 Quantitative research The proportion of purchasers of standalone policies as classified by the provider is relatively small compared with rider product holders. The sample of purchasers of standalone product holders was therefore boosted in each survey to ensure a sufficient number for analysis and the data weighted back to match the sample profile. A more detailed description of the sampling process and weighting can be found in the technical appendix Sample profile Product type Critical illness products sold as a rider benefit account for the majority of all CIC policies sold 7. While this statistic is derived from product sales data recorded by the insurer, the definition of product type used throughout this report is based on the consumer s perception of how they bought the product. The baseline survey identified a discrepancy between the two definitions for a discussion of why the consumer s perception was used; please see the previous report detailing the baseline survey findings 8. Consumers were asked to say whether they had taken out the product on its own or alongside another product like a loan, mortgage or life insurance, the results of which are shown in figure CR 77 - Post implementation review of ICOBS: Oral Disclosure Rule in sales of Critical Illness Cover baseline survey 20 of 85

22 Quantitative research Figure 1 Thinking about when you took out this Critical Illness Cover, did you take it out on its own or did you take it out together with another product (e.g. such as with a mortgage, loan or life insurance policy)? % On its own Alongside mortgage Alongside loan Alongside life insurance Alongside other product Other/ Don't know Wave 1 Wave 2 Base: All (Wave 1: 500; Wave 2: 515) One in three (32%) consumers had purchased the CIC on its own while 65% had taken it out alongside another product. In these instances, consumers had tended to take the cover out with either a mortgage or life insurance (22% and 32% respectively). The sharp decrease in those purchasing CIC alongside a mortgage was due to the dramatic fall in mortgage sales as a result of the credit crisis at the time of the survey, rather than any change in the sales approach to CIC. The majority of consumers bought their policy face to face (85%) and very few had cancelled the product nearly all (94%) still had the critical illness cover that they had taken out six months previously. Other product holding One in three (30%) critical illness policyholders also had additional income protection insurance. Consumers of higher/medium financial sophistication were more likely to have this extra protection compared with lower financially sophisticated consumers (36% and 23% respectively). 21 of 85

23 Quantitative research Around half of those interviewed (46%) said that they had taken out critical illness cover before. 4.2 Consumer understanding Headlines There has been no noticeable increase in consumer understanding between the pre-implementation stage and post-implementation stage Most consumers still believe they have a good understanding of their policy 84% claimed to understand their policy well overall There are still widespread and fundamental misunderstandings about coverage and payments There appears to be confusion of CIC with income protection products 70% consumers thought they could claim for any illness which meant they were unable to work Perceived understanding The main finding from the baseline survey was that there was a clear gap between consumers perceived understanding of CIC and their actual understanding of the product. Overall most seemed confident about the product they had bought, they felt they understood most of the features well and were happy with the service provided by the adviser. However when asked direct questions which tested their knowledge of the product, there was widespread misunderstanding of some of the key areas of the product. These included the illnesses covered and not covered, with most tending to overestimate the coverage of their CIC product. Other key misunderstandings centred on the reasons why claims might be rejected and how consumers would receive a payout in the event of a successful claim i.e. whether they would receive a lump sum payment or regular payments over time. 22 of 85

24 Quantitative research The second stage survey was conducted with these findings in mind. Policyholders in the baseline survey generally felt that they understood their product either very well or quite well (84%). There was no change in this proportion in the second survey (see figure 2). Figure 2 Now thinking about the Critical Illness Cover itself, how well would you say you understand the policy you have taken out? Wave Wave % Very well Quite well Not very well Not at all well Don't Know Base: All (Wave 1: 500; Wave 2: 515) As in the baseline survey, those who had purchased their CIC via an intermediary were more likely to say that they understood their CIC very well (27%) compared with those purchased directly from the insurer s sales force or tied agents (19%). As in the baseline survey, perceived understanding tended to correlate to financial sophistication level. The level of sophistication was based on self-classification by consumers according to the attitudes they held towards financial products. This report refers to three types of financial sophistication level high, medium and low. The definitions of the three types are illustrated in figure 3. A greater proportion of those with higher/ medium financial sophistication levels claimed to understand their policy well compared with those with lower levels of financial sophistication (92% and 76% respectively). 23 of 85

25 Quantitative research The baseline survey highlighted that all consumers over-estimated their level of understanding, regardless of financial sophistication level. The second stage survey has seen this over-estimation persist. Figure 3 Label High Medium Low FINANCIAL SOPHISTICATION LEVELS Description I have a very good knowledge and understanding of financial products and services; I like reading the financial pages of the newspapers and I like to make my own choices about financial products and services I have a reasonable knowledge of personal finance products and services and I am able to weigh up the advice of finance professionals when choosing a product to suit my personal circumstances Financial issues are best left to the experts I generally rely on the advice of financial advisers, friends or relatives about which products are best for me A small proportion of consumers claimed not to understand their policy well (14%). Reasons for not understanding the policy are detailed in figure 4 below. 24 of 85

26 Quantitative research Figure 4 Why do you say you understand your policy not very well or not well at all? Have not read the paperwork (fully) 20 Understood before but have forgotten Not so sure after being asked questions I don't understand these things I needed it so just took it 7 Not sure what is covered and what isn't Felt rushed during sale Not sure I need it now Can remind myself of paperwork if needed Not enough printed information provided Small print (no further detail) Was not explained properly at the time Was not paying attention to the adviser 2 Other answer % 30 Base: All who understand CIC policy not very well or not well at all (70) The most common reason why consumers felt they did not understand their policy well was that they had not read the paperwork fully (20%) or had problems recalling the details so long after the event (12%). There was little evidence reported by consumers that the explanation of the features was inadequate just 4% said that it was because it was not explained properly at the time. However, one in ten (11%) also said that after being asked questions about their policy, they were not so sure about how well they understood it. This was a theme that came out strongly in the qualitative research, i.e. that respondents felt they understood their policy well, but had not really thought about it before being contacted for the research. When asked about the details and possible exclusions to their policy, they realised that their actual knowledge of the policy was less than they had previously thought. This research effect can be seen in section where consumers were asked about future purchasing behaviours. Understanding of key features Most consumers felt they understood their policy well overall. They also claimed to understand some of the key features well although some aspects were felt to be better understood than others. The cost of the policy was the aspect of the CIC that 25 of 85

27 Quantitative research policyholders were most likely to feel that they understood well with 93% saying that they understood this either very well or quite well (see figure 5). Figure 5 How well respondent understands aspects of CIC Cost of policy How to cancel How to make a claim Reasons why claims may be rejected % Very well Quite well Not very well Not at all well Don't know Base: All (515) Around three-quarters (76%) felt they understood how they would go about cancelling their policy. Making a claim under the policy and possible reasons why claims might be rejected were felt to be understood by around seven in ten consumers (70% and 68% respectively). This pattern is consistent with the findings from the baseline survey. Sources of information Consumers mentioned a variety of sources of information about their policy, and most mentioned the adviser and the policy documentation as sources of information. When asked to name their main source, around six in ten (57%) said the adviser was the main source of information about their policy (see figure 6). 26 of 85

28 Quantitative research Figure 6 SOURCES OF INFORMATION ABOUT CRITICAL ILLNESS COVER POLICY All mentions Main source Wave 1 Wave 2 Wave 1 Wave 2 % % % % Adviser Policy documentation Previous experience Friends/family Internet 8 13 * 3 Other Base This reliance on the adviser was also seen in the baseline survey results. This is not surprising previous consumer research undertaken as part of the ICOB review market failure analysis 9 showed that purchasers of protection products relied more heavily on oral rather than written disclosures. Confidence about suitability of the product Many consumers expressed great confidence when asked about their disclosure obligations, which was once again consistent with the baseline survey. Eight in ten (81%) consumers felt very confident that they had provided all of the medical information that was required of them (see figure 7) of 85

29 Quantitative research Figure 7 Confidence about this aspect of their CIC Provided all medical information I need Most suitable product for my needs Know which illnesses are covered Know which illnesses are NOT covered % Very confident Quite confident Not confident Don't know Base: All (515) In contrast with the baseline survey, a higher proportion of consumers in the second survey felt confident that they had purchased the most suitable product for their needs (87% and 94% respectively). As in the baseline survey, the majority of policyholders claimed to be confident that they knew which illnesses were covered or not covered by their CIC. However there was still a significant minority who were not confident. One in five (20%) were not confident that they knew which illnesses were covered while one in three (33%) said they were not confident about illnesses excluded from the cover. Confidence varied by financial sophistication level those who were less financially sophisticated tended to be less confident about the coverage of their policy (see figure 8). 28 of 85

30 Quantitative research Figure 8 CONFIDENCE IN COVERAGE OF POLICY Overall % not confident Higher financial sophistication % not confident Medium financial sophistication Lower financial sophistication % not confident % not confident Illnesses covered Illnesses not covered Base As one might expect, those consumers who felt they understood their policy tended to be much more confident about which illnesses were covered or not covered by their policy (see figure 9). Figure 9 CONFIDENCE ABOUT DIFFERENT AREAS OF THE POLICY Provided all of the medical information needed to the insurer Most suitable product for your needs Know which illnesses are covered by the policy Know which illnesses are not covered by the policy Understand policy well Do not understand policy well % confident % confident Base For three of the four areas in figure 9, those who claimed to understand their policy well were more likely to be confident about these areas than those who did not Actual understanding The baseline survey highlighted the disparity between what consumers thought they knew and what they actually knew. This section focuses on consumers actual understanding of the product. 29 of 85

31 Quantitative research Disclosure Most policyholders felt confident that they had disclosed all relevant information to the insurer, and most could remember disclosing their medical history (63%) while other details were less well recalled (see figure 10). Figure 10 When you take out Critical Illness Cover, certain information needs to be provided to the insurer. What information were you asked to provide? Medical history/ previous illnesses Family history of illness Personal details Smoking Occupation Alcohol consumption Financial situation Sexual health/ lifestyle Information about children Present health state Dangerous sports/ pastimes Lifestyle Travel GP details Other Don't know/ no answer % Wave 2 Wave 1 Base: All (Wave 1: 500; Wave 2: 515) The pattern of responses was largely consistent with those seen in the baseline survey. However, a smaller proportion of consumers recalled having to disclose information about any previous illnesses in the family (22% from 35%). There was also an increase in those mentioning that they had to disclose details of their financial situation (9% from 4%). The concept of disclosing relevant information to insurers was understood by 95% of consumers. However, around one in three (36%) said they did not want to reveal certain aspects of their lifestyle to the insurance company (see figure 11). 30 of 85