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LONG TERM CARE INSURANCE i This document is in two parts. Chapter 1 seeks views on whether the selling and marketing of long term care insurance should be regulated by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA). Chapter 2 seeks views on the conclusions of the Committee on Long Term Care Investment Products that CAT standards be set for long-term insurance products; ii Readers are invited to give their views on the proposals and respond to the Treasury by: 30 March 2001iii Please reply to: Gerry Foley Tel no 020 7270 5292 Fax no 020 7270 4694 E-mail gerard.foley@hm-treasury.gsi.gov.uk iv This document is also on the internet through the Treasury’s home page http://www.hm-treasury.gov.uk. v Please explain in your reply if you represent an organisation, and if so, to indicate its membership and coverage. The Treasury may make your answer public unless you say it should be kept confidential. LONG TERM CARE INSURANCE OVERVIEW What long-term care insurance does1. Long term care insurance provides a planned way of paying for the cost of any long-term care a person may need immediately or in the future. Through either a lump-sum payment in advance, or regular premiums, people can buy insurance to cover the cost of care in their own home, or in a residential or nursing home. It is usually intended to bridge the gap between a person’s income and the cost of care, rather than to meet the full cost. 2. Long-term care insurances are taken out in the event that people have chronic problems. The payments are triggered by a person failing to meet 2 or 3 activities of daily living, such as feeding, dressing, and so on. This is different to medical insurances that are generally taken out in the event of a short-term acute problem. What long-term care insurance does not do3. Long-term care insurance does not provide for or guarantee the quality of treatment or care provided. What regulation does4. Regulation aims to provide protection and redress; to enable consumers to buy the right product for their circumstances; to shield them from any detriment in the market that would affect the ability of their policy to meet their needs as planned; and to protect people from avoidable worries about their future security. This is a particular concern for those considering taking out long-term care insurance because many policies are sold at a time of stress or crisis in consumers’ lives. They may, therefore, be particularly vulnerable to mis-selling. What CAT standards do5. CAT standards provide benchmark minimum standards for appropriate financial products. They do not guarantee the performance, nor does it mean that they are the best product available. However, they are a safe product to buy and can be a tool to help those looking for more sophisticated products to compare across the range available. What this paper does6. This paper concentrates on the selling and marketing of the financial plan. That is the provision of information to potential customers in a way that enables them to make informed choices. Chapter 1 summarises the main issues and seeks views on whether the selling and marketing of long-term care insurance should be regulated by the Financial Services Authority (FSA). It identifies four options – including the Government’s preferred option of regulating the sale and marketing of long-term care insurance (option 3) - and invites views on these. 7. Chapter 2 seeks views on the main conclusion of the Government’s working party on long-term care investment products that CAT standards should be introduced for long-term care insurance products. Government action8. Long-term care insurance mostly benefits those of pensionable age. The Government has recently announced a number of measures to help pensioners get full value from their savings and ensure they are not penalised for providing for themselves. These measures include changes to both the rules covering assets and costs of those going into care, and pensioners’ income generally. The Financial Services and Markets Act (FSMA)9. The provisions of the FSMA will come into force during 2001. This delivers far-reaching changes in the regulation of financial services to improve consumer information and protection - including disclosure of information about products - in a way that will help buyers make the right choice for them among the products available. 10. The Government notes that regulation of long-term care insurance was recommended by the Royal Commission on Long Term Care, the Treasury Committee of the House of Commons, and the Joint Scrutiny Committee on the Financial Services and Markets Bill (containing Members of both Houses of Parliament) to provide protection to these consumers. CHAPTER 1 - REGULATION Context 1. The Government believes that it is essential to protect the interests of people planning for their financial future where there may be either a real risk that their planned provision could fail, or a real concern that it might, resulting in unnecessary worry for consumers. The need for such security requires particular consideration in the case of long-term care insurance plans. This is because the financial planning is done by, or on behalf of, potentially vulnerable users, as well as because it is needed to provide for treatment or care in old age. 2. It is important to recognise that financial regulation can have additional costs for the consumer, and that it cannot cover standards of treatment or care bought using the financial plan. 3. The options for regulation discussed below can offer financial protection. The Government would welcome views on a number of the issues that are set out. The long term care insurance market today Size 4. The present market for long-term care financial plans is very small. Since they were first sold in 1991, 14 companies offer them, with only about 34,000 policies currently in force. The lack of a significant claims history poses serious challenges to actuaries in the pricing of insurance plans. Affordability 5. It is not easy to provide estimates of the costs of long-term care insurance because each user’s financial and personal circumstances differ considerably, and are affected by when they take out such a plan. There is as yet no significant claims history to take into account. 6. These plans are expensive. The Royal Commission reported that a typical single premium policy would cost over £9,000 for a man and £16,000 for a woman. A point of need purchase of an annuity or equity release plan could cost between £40,000 and £50,000. (See paragraphs 15 – 16.) 7. The introduction of free nursing care, changes in the treatment of capital assets and increasing pensioners’ incomes through changes to tax and benefits will reduce the amount the elderly might have to pay for care. If increasing awareness of and confidence in long-term care plans encourages users to buy these earlier, this would further reduce monthly premium costs. 8. Together, these factors suggest that long-term care insurance may become increasingly affordable, although it will always be a sizeable cost which potential users will need full confidence in before committing themselves. 9. As long-term care insurance is intended to bridge the gap between income and the cost of care, those with lower incomes have a bigger gap to bridge, so must insure for higher premiums. They are less likely to be able to afford to do so. The Government wants to ensure that whatever action is taken following this consultation reflects this important factor. Product range 10. Even with a very small market in terms of numbers of customers and individual policies or plans, there is a diverse range of plans available:[1] (a) insurance-based plans: offered to currently healthy individuals with no immediate need for care. These give protection cover to meet the ongoing costs of long-term care costs in the future, or to pay a fixed sum if the insured becomes liable for long term care costs. Premiums may be paid by instalments or through a one-off payment; (b) single premium investment bonds: a variation of pre-funded insurance. The premium to pay for the pre-funded insurance is withdrawn monthly from the bond, or from income earned by the bond; (c) immediate needs (or point of need) plans: typically immediate needs annuities, offered where long term care is required right away. Benefits payable depend on the age of the beneficiary and how much capital is available to purchase the annuity; and (d) home equity release plans: which allow homeowners to release the value of their property above any amount owed on a mortgage. There are a number of schemes, but typically, they are used to buy an annuity for a fixed income for life (with the loan repaid on death or the sale of the property). 11. All these plans are expensive, and it has to be remembered that they are typically taken out when the beneficiary has ceased earning from paid employment and is reliant on retirement savings. The Royal Commission on Long Term Care for the Elderly12. In its report in March 1999, the Royal Commission published useful information and made a number of recommendations, including that the Treasury and Financial Services Authority (FSA) begin work to bring all long-term care insurance under full conduct of business regulation at the earliest possible date. 13. The Royal Commission’s main recommendation was that personal care should be paid from general taxation. It noted that private sector solutions, such as the use of long-term care insurance, could not now, nor in the foreseeable future, offer a solution to the funding of long-term care for all people. 14. The Royal Commission thought there would be scope for long-term care insurance to help in some cases, but there were concerns about how such insurance might be provided to a potentially vulnerable group of customers. It said that long-term care plan buyers tended to be older or at a moment of stress or crisis in their lives. Although regulation might add to the costs of the policies, it thought that a regulatory regime would prevent abuse. 15. The Royal Commission reported that a single premium policy taken out by a 65-year old woman for a benefit of £1,000 per month for life, with three months’ deferral (ie before the first payment is made) would cost £9,306 for a fixed-level benefit. With inflation cover up to 15% RPI, it would cost £16,408. Because of different life expectancy, the corresponding figures for a man would be £6,430 and £9,228 respectively. 16. An annuity taken out at need, or through an equity release plan, to yield sufficient to pay for care might cost between £40,000 and £50,000 depending on the medical requirement. The Government’s response and other recent developments 17. The Government’s response to the Royal Commission was published on 27 July 2000. This included several decisions that may have consequences for the future development of the long-term care insurance market. 18. These include: provision that the value of a person’s home should be disregarded for up to three months after admission to residential care; that there should be free NHS nursing care from October 2001; and that capital asset limits should be up-rated to their 1996 level with effect from April 2001. 19. The Government estimates that ending the need for those in nursing home care to pay for registered nurses involved in their care, or for specialist equipment, can save the elderly up to £5,000 for a year’s stay in a nursing home. This does not take into account estimated savings of £2,000 - £2,500 during the first three months stay in a residential or nursing home, or proposed increases in state pensions and the minimum income guarantee which will further reduce the gap to be bridged. 20. However, Age Concern Financial Partnerships have carried out some work to show the effect that the Government’s decision might have on long-term care insurance premiums. They have, however, used a rather more conservative figure of £50 per week savings rather than the £100 per week suggested by the Government’s own estimate. Even so, premium savings under the Age Concern scenario amount to some £208 per year for a 68-year old man and £260 for a woman of the same age. 21. The figures are as follows: Current position £ Care fees 350 per week Income 150 per week Shortfall (200) per week Long-term care insurance premium 16 per week[2] Revised position Care fees 350 per week Income 150 per week Free nursing care 50 per week Shortfall (150) per week Long-term care insurance premium 12 per week Regulation today 22. The FSA already regulates the selling and marketing of immediate needs plans, such as investment bonds and annuities. From 2002, equity release plans will fall within the same FSA disclosure-based regulatory regime as mortgages, because they are secured against a domestic residential property. 23. The Financial Services and Markets Act (FSMA) 2000, and its predecessor, the Financial Services Act 1986 (FS Act), regulates investments. Long term care insurance-based contracts are often pure insurance plans. In most cases, premiums purchase protection. If no claim is made, premiums cannot be reclaimed or recovered - though the investment bond may differ. There is no investment for the purchaser and they do not now fall within the ambit of the FS Act. The case for statutory regulation 24. The Royal Commission clearly found that there are sufficient grounds for full conduct of business regulation. The Government has looked at its recommendation and agrees that greater protection is required for such a vulnerable user group. 25. When considering regulation, the Government takes into account perceived and actual detriment to be found in an unregulated market, and balances these against the costs and benefits to industry and consumers. This usually happens in established markets where documented cases of consumer detriment have come to light. 26. As far as the Government is aware, there is no evidence of consumer detriment in the long-term care insurance market. So the case for the regulation of long-term care insurance has to be considered from a different perspective: the need to protect people at a sensitive time in their lives. The consequences of people being sold an unsuitable product could be disastrous to consumers if the product does not provide the benefits needed. 27. Also, as long-term care insurance premiums can be a substantial outlay for most consumers, it is important that protections are in place to ensure they are not defrauded or otherwise sold unsuitable products. 28. The market may grow following recent Government action that will reduce the gap between income and care costs, and hence premium costs, for those requiring long-term care insurance. If so, it is essential that protections and redress systems are put in place. 29. The Government cannot be certain how many new polices will be sold. As well as the incentive of reduced premiums, regulation itself could make long-term care insurance more attractive if it increases consumer confidence. A significant increased interest by consumers could in turn attract more providers, improving competition in the market. This could be a virtuous circle, mutually reinforcing the attraction and growth of long-term care insurance products and sales, but it is difficult to estimate to what extent this may happen. 30. Long-term care insurance and the issues affecting the choice of the right product are complex, not least because of the interaction with state benefits and the tax system. Yet people often have to make that choice at a stressful time in their lives. They need appropriate help to make sure they can make the right choice. 31. Regulation could achieve this by delivering advisers working to commonly agreed training and competence requirements, and accountability for the advice they give. It could also give consumers peace of mind and help protect them from the possibility of mis-selling. The case against regulation32. There is no evidence of consumer detriment in the present very small market. It is not clear if the market will take-off as a result of the Government’s decisions on nursing care, pensions and the minimum income guarantee. This is because people do not foresee the need for long-term care. Where they do, they say they expect either the state or their families to look after them. 33. Also the market is presently relatively static, but some people have argued that regulation might stimulate more sales as consumers would feel confident in purchasing the products. If there is no significant detriment, there must be a doubt whether increasing product sales through increasing consumer confidence is a proper justification for regulation. The Options for regulation 34. On careful consideration of these arguments, the Government believes that the case for regulation is sufficiently well made to consider options for how this could be achieved. The Government has identified four options: Option 1- No statutory regulation. Rely on a voluntary code of practice and on the industry adopting CAT standard benchmarks for minimum standards for cover, access, terms to help them (Chapter 2). Option 2- Partial regulation. This would involve authorisation of plan providers, with a standardised disclosure regime to cover the information provided to potential purchasers. Option 3 - Full conduct of business regulation, covering advice as well authorisation and disclosure, in the selling and marketing of long-term care insurance ie full conduct of business regulation. Option 4 - Full conduct of business regulation of the sale and marketing of all medical insurance plans, including critical illness insurance, permanent health insurance, as well as long-term care insurance. Discussion of Options35. There are several arguments for each option that should now be looked at in more detail. Option 1 36. It is argued that the industry, recognising the particular concerns surrounding long-term care insurance, has already developed a code of practice on the sale of long-term care insurance plans. At the same time, experience with CAT standard ISAs and mortgages have shown that the benchmarking approach can deliver real benefits alone or within a regulatory regime. 37. It is also suggested that the publicity surrounding voluntary CAT standards (see Chapter 2) could help to meet wider objectives of increased consumer protection and confidence as well as increasing consumers’ awareness of what long-term care insurance offers. Even the initial publicity for minimum standards can be enough in itself to influence product providers’ behaviour to consumers’ benefit - even before they come into effect. Option 238. It is claimed that plan providers already meet stringent criteria as to their honesty, competence and financial soundness as they are already subject to prudential regulation by the FSA, while many may also already be authorised by the FSA for other plans, or other types of business. 39. In addition, and subject to FSA consultation, the voluntary code of practice and CAT standards might be included within a statutory disclosure regime. It is claimed that these additional protections can be provided without the full gamut of conduct of business regulation, which would add to industry and consumer costs. Option 340. Full conduct of business regulation for plan providers and independent financial advisers or salesmen would mean these would need specific permission from the FSA to sell long-term care insurance plans and have to meet on-going compliance costs. This would add to the costs to consumers and plan prices. 41. But there would be increased protection for consumers through the sellers and marketers needing to meet stringent criteria as to their honesty, competence, and financial soundness. Advisers would also need to comply with certain training and competence requirements before being allowed to sell the plans. Option 442. Long-term care insurance may initially seem similar to medical indemnity insurances, but there are clear distinctions that need to be taken into account. Long-term care insurances are taken out in the event that consumers have chronic problems (for the elderly, usually pensioners), with payments triggered by a consumer failing to meet 2 or 3 activities of daily living (ADLs) such as feeding, washing and dressing. Benefits are in principle payable for life, or at least until the beneficiary no longer needs care. 43. By contrast, medical insurances are taken out in the event of a short-term acute problem. Benefits tend to be one-off lump sums, or income replacement paid up to retirement or until the beneficiary returns to work. As a result, they are generally less expensive and more flexible, with annual premiums and consumers have the option of moving to another provider each year, without loss of benefits. 44. There is no investment element. By including such plans in the regulatory regime, this would substantially add to the scope of FSA regulation. There is no evidence of consumer detriment in the sale of these plans that would warrant FSA regulation. The Government’s preferred option45. On balance, the Government believes that, because of complexity and the need to ensure that the most suitable products are sold to people who are frail or at a time of crisis in their lives, that the FSA should be given the power to regulate the selling and marketing of long-term care insurance, but not other medical insurances (option 3). Definition of coverage 46. If option 3 is adopted, the Government needs to find a legal definition that would distinguish between long-term care plans, and other medical insurance plans. An earlier consultation in 1996 suggested a definition that, in fact, would have brought some medical indemnity insurances into regulation and exclude certain long-term care plans. 47. The Government proposes that the regulation should specify that long-term care insurance is one where the benefits of the plan were capable of being paid over the whole outstanding life of the policyholder, once a valid claim is accepted, but it would be interested to hear any better suggestions from readers. Costs of regulation 48. A regulatory impact assessment is attached at Annex E. This suggests that it is difficult to quantify the costs of regulation to the industry. It has not been possible therefore to quantify any additional costs to consumers. 49. The ABI estimate that the costs for an individual plan provider might be about £1 million annually for a firm that is already authorised. For a new firm entering the market, this cost might be £3 million with ongoing costs of £1.5 million per year. 50. There might be one-off costs of up to £600,000 (in total) for 200 – 300 Independent Financial Advisers (IFAs) currently selling the plans. The costs of the disclosure regime would be the same for plan providers, but minimal for IFAs. 51. If the Government decides to give it the power to regulate, the FSA will assess the costs and benefits of how regulation can be delivered in the most appropriate, cost effective way. Timetable and method of consultation 52. The Government would welcome written comments on this document by: 30 March 200153. If the Government decides to give the FSA responsibility for regulating long-term care insurance, the Treasury will consult about the legal definition to be included in a regulatory activities order under the FSMA. In parallel, or shortly thereafter, the FSA will consult about its high level approach to long-term care regulation. The FSA will also need to consult about the detailed regulatory rules. No timetable has yet been set for this consultative process. Home Financial Services Team HM Treasury December 2000 CHAPTER 2 – CONCLUSIONS OF THE COMMITTEE ON LONG TERM CARE INVESTMENT PRODUCTS 1. In early 2000, a Treasury-led committee on long term care investment products was established. It was asked to define financial products that offered reliable, efficient and effective means of saving for long-term care insurance. Its terms of reference are set out at Annex A. 2. This paper concentrates on the main recommendation: minimum benchmark standards – known as CAT (Cover Access Terms) standards – for long-term care insurance products. CAT standards for long term care plans3. The Government has already pioneered CAT standards for Individual Savings Accounts (ISAs) in the personal savings sector, and developed CAT standard mortgages in the home loans market. These CAT standards have shown that they can deliver benefits to consumers. The Government has already announced its intention to consult on their use with a wider range of financial products. 4. CAT standards are an important part of providing simple, clear, and easily comparable information to consumers. Consumers can rely on these products to ensure that there are no restrictive, unfair or complicated conditions which may come back to haunt them later on. 5. CAT standards are voluntary. Not all providers offer CAT standard products. Of those that do, not all their products would be CAT standard. But all providers are expected to draw the attention of all potential purchasers of that type of product to the standards for comparison purposes. 6. The Government now proposes to extend CAT standards to the area of long-term care plans. A draft CAT standard is attached at Annex B. The practical benefits for long-term care purchasers are discussed in detail at Annex C. These include guidance on how the need for long-term care would be assessed and how safeguards for such potentially vulnerable users can be provided. A checklist of questions that would-be consumers should ask of their product providers or advisers is set out in Annex D. 7. The Government would welcome views from consumers and the industry on whether these can be improved. 8. While not necessarily being the right product for every individual (which depends on individual circumstances) CAT standard long-term care investment products are intended to be straightforward, clear and fair. They will be easy for consumers to understand. And consumers who choose CAT standard products should not face unwelcome surprises later on. 9. The issues covered by the CAT standard are central to providing the security consumers would be seeking. These centre primarily on clarity regarding the key features about the products; the processes governing claims and benefits; and issues covering the costs of cover, including the effects of inflation. Clarity 10. One fundamental principle is involved here - what you see is what you get. Annex C sets out in detail what information the customer especially needs to be clear about. The key features of each product would be set out in simple language before the purchaser makes any commitment. Claims and benefits 11. Consumers need to be clear about what criteria need to be met to trigger a claim; how that claim would be processed and how any resulting benefits under that claim would be paid. There will also need to be a dispute resolution procedure in place, should agreement not be reached between consumer and provider. Costs 12. Recent experience has been that medical and care costs have risen faster than the general level of inflation. Some long-term care products automatically up-rate premiums and benefits in line with inflation; some of these have an upper limit (“a cap”) limiting the extent of any increase. Others offer a level premium (ie without future increases) for a set level of benefit cover. 13. The consumer needs to be clear about the cost of cover, and the impact future increases may have on his or her ability to pay for it, and the level of cover. They should have as much flexibility as possible in selecting the option most suited to his or her needs. How CAT standards will be delivered14. Long-term care CAT standards have already been canvassed widely and discussed with the industry. Subject to feedback, it is expected that the CAT standards would be codified as part of (or alongside) the Association of British Insurers’ (ABI) current code of practice - to which the main providers of long term care financial products will subscribe. 15. Firms will be expected to draw the CAT standards to the attention of potential consumers considering a long term care financial product, whether it is a CAT standard product or not. In the latter case, the provider would need to compare the features of that product against the CAT standards. Failure to meet the standards16. Firms are not obliged to offer a CAT standard product within their product range, though the Government believes it will be in their commercial interest to do so. But where they do, product descriptions, including those carried in advertisements, would need to meet the standards, both in spirit and in letter. 17. A firm providing a product advertised as meeting the standards, and sold on that basis, can, amongst other things, be in breach of advertising regulations and possibly contract if, on subsequent challenge, the product was found to be non-compliant with the CAT standard. 18. It is in firms’ interests to ensure that their CAT standard products are sold by, or advised upon, by staff having an appropriate level of training and competence. 19. The Government would be disappointed if a provider is found to be consistently delinquent in meeting the CAT standard. And if the Financial Services Authority is given statutory responsibility for the regulation of long term care financial products, such breaches would also fall to the attention of the regulator who could take appropriate action. The way ahead20. The Government would welcome views on: (a) the concept of CAT standards for long-term care plans; and (b) the details of the proposed standards. The Committee on long-term care investment products21. On 2 December 1999, the Secretary of State for Health committed the Government to explore with the financial services industry ways of designing long-term care financial products with wider market appeal. In early 2000, the Treasury established a committee on long-term care investment products to look at these issues. 22. The committee’s primary mission was to seek to define financial products that offered reliable, efficient and effective means of saving for long-term care costs. Statutory regulation was not within the committee’s remit. 23. In addition to Treasury officials, the committee included officials from the Department of Health, Inland Revenue, the No.10 Policy Unit and the Financial Services Authority; a member of the London School of Economics; and representatives from the Consumers’ Association; Age Concern; the Association of British Insurers, and firms and advisors drawn from the financial services industry. 21. This Chapter has been prepared and issued by HM Treasury, informed by the views of the Committee. The Treasury would like to place on record its appreciation for the valuable, frank and extensive contributions made by all those who participated and gave of their time freely. Home Financial Services Team HM Treasury December 2000 Questions for feedback 1. Do readers agree that the Government should give the Financial Services Authority responsibility for regulating the selling and marketing of long-term care insurance (Chapter 1, paragraph 45) 2. How might the Government define long-term care insurance legally if it decides to give the FSA full conduct of business regulation? (Chapter 1, paragraph 46) 3. How could the Government ensure that its legal definition ring-fences long-term care insurance from other medical insurances? (Chapter 1, paragraph 47) 4. Would readers provide an estimate of compliance costs under FSA regulation, both for full conduct of business and a disclosure regime. (Chapter 1, paragraphs 48-50 and Annex E, paragraphs 32-37) 5. Do readers agree in principle that CAT standards could be used as a benchmark for long-term care insurance products? (Chapter 2, paragraphs 3-9) 6. Do readers have any comments or suggestions on the detailed standards? (Annex B) These questions are designed to focus readers’ responses on some of the main issues. They are not exclusive and the Government would welcome any other comments or views which readers wish to make. ANNEX A COMMITTEE ON LONG TERM CARE INVESTMENT PRODUCTS Terms of reference The Committee is invited to follow up the statement of 2 December by Alan Milburn, Secretary of State for Health, in which he said: ‘…..we intend to explore with the financial services industry how it could best design long term care insurance products, and other financial products, to see if they could be made attractive to a wider audience.’ The Committee should seek to define financial products which offer reliable, efficient and effective means of saving to pay for long term care costs. The products may be any kind of retail financial services vehicle, including immediate needs facilities. The Committee should not consider financing issues such as equity release. In developing product design criteria, the Committee is asked to consider: - cost - reliability - ease of understanding - competition - the trade-off between simplicity and one-stop shopping - the claiming process. The Committee is also asked to recommend how providers could be encouraged to market acceptably designed products, eg through: - disclosure - benchmark(s) - minimum standards (eg a kitemark) - code(s) of conduct - invitation to tender. When the Committee reports, the Treasury will then consider whether marketing of long term care savings products should be regulated under the Financial Services and Markets Bill, currently before Parliament. Separate public consultation on this point would be required. ANNEX B
ANNEX C NOTES on the CAT standards 1. These are the standards the Government and policy providers believe consumers should expect when purchasing a long-term care policy. The standards cover the sales process, the content of the policy, disclosure of the main terms and conditions and the service you can expect if you need to claim. The standards govern the financial products being sold. They cannot and do not cover the quality of care. 2. Some questions you should ask when considering a long-term care policy are attached. It is in your interest to ask possible policy providers how the products they are offering will meet these standards. Common features for both immediate needs and insurance plans - Benefits are capable of being paid for life 3. Your benefits under a plan cannot be limited by the plan provider to a set period of time. Once they begin, they are payable for life as long as you qualify because of your medical conditions. With insurance plans, this will be for as long as you are unable to carry out 3 activities of daily living (known as ADLs) such as eating, washing and dressing, or fewer if your plan provider agrees. With immediate needs plans, this will be for as long as the original medical conditions when you took out the plan continue to show you need care. The medical conditions would include certain mental conditions that may mean you need continual supervision or care. - Choice is offered, within different pricing structures, between benefits being increased in line with [RPI], and buying a fixed level of cover 5. You will need to bear in mind that medical and care costs tend to increase more rapidly than inflation generally - though it is hard to predict how they will rise. A plan that enables benefits to keep pace with inflation guards against this risk. But this inflation- proofing comes at a price, and you may want to consider the alternative of buying a fixed level of cover for a fixed price. You should have a choice between a plan that enables you to increase your benefits in line with inflation, and one that provides a fixed level of cover. Whichever option you choose at the start, you should be able to switch to the other, later, though there could be extra costs in doing so. - Encouraging the involvement of a person’s close family or appointed representatives at the time of sale 6. Consumers cherish their independence and prefer to make their own decisions when taking out long-term care insurance. Plan providers and advisers cannot force prospective policyholders to involve their families if they do not wish to. Even so, consumers should be encouraged to involve their families, or inform them that they have taken out a plan. 7. In view of the medical symptoms required to trigger a claim, people may not be able to contact their plan providers themselves. So it is in their interests to tell a family member or appointed representative about the policy, so that the necessary arrangements can be made. - Use of sensitive sales and marketing techniques 8. Taking out these policies is an important step. You should not be pressured into making hasty decisions. You will also have a period of 30 days to cancel the contract if you change your mind. Generally you will get a full refund of your money. But in some cases, if your plan is linked to stock market or investment performance, you may not get all your money back if the markets have fallen during the 30 days. Your plan provider will let you know if your plan is one of these, at the time of sale. - Who to complain to, and procedures for resolving disputes 9. Plan providers should have a complaints procedure independent of the person who sold you the policy. The documents should explain how and to whom you should complain. If the plan provider does not put matters right to your satisfaction, you can take your complaint to the relevant independent complaints scheme. The plan provider should tell you which one to contact. - Information must be given on how the policy interacts with State benefits; other information must also be given 10. When considering what your plan benefits will be, you will also need to consider how much you might get from State benefits. Your adviser will explain the current position when you take out a plan (or make a claim), but there may be significant changes to State benefits in the future that could affect your plan benefits. These changes are outside the plan provider’s control. In these circumstances, either the premiums could be inadequate to provide the expected plan benefits, or the plan benefits might no longer cover your needs. If this happens, plan providers must quickly inform you of the change so that you can make any necessary arrangements. 11. Alternatively, there might be an improvement in State benefits and the tax system, but you will still want to know this. Different local councils also offer a range of support services. Your adviser should be able to tell you who to contact. - Plan providers must offer annual visits to claimants or their personal representatives. 12. When you are receiving benefits under the plan, your plan provider must make an annual visit to you or your personal representatives. This is a time to discuss any matters of concern about the care you are receiving. It is also the time for the plan provider to explain any significant changes to the tax and benefits system, and the consequences for you. - Plan providers must process claims within 13 weeks of the date of notification provided they have all the information. 13. Plan providers must agree to process all claims within 13 weeks. The last thing you want is to worry about whether you can pay for essential care. Sometimes though, they may have to wait for a specialist’s report or other medical information. - Consumers and their appointed representatives must be informed of their own obligations and responsibilities. 14. You have obligations in relation to the plan. These include complying with the plan provider’s requirements in getting medical assessments of your condition when claiming; reporting any changes in circumstances; and so on. Your obligations will be explained at the time of sale and in plain English in the policy documents. Specific features of insurance plans- Normally, failing three Activities of Daily Living (ADLs), will trigger the payment of benefits 15. Failing to perform a number of activities of daily living (known as ADLs) such as feeding, washing and dressing is the trigger for long-term care policies to pay benefits. When an individual is unable to carry out these activities, they need care. However, people have their good days as well and their bad days, and it is possible that an assessment on a good day might give a misleading picture. Your insurance provider will take this into account. Your ability to carry out these activities will be assessed by a qualified professional expert. - Benefits are payable direct to the care provider or to the claimant or their appointed representatives. 16. Where benefits will be paid depends on several things. If you are cared for in a hospital or residential home, payment could go direct to them. If, however, you are being cared for at home, you may be able to choose whether payment goes to you or your appointed representative (who will then pay for the care) or direct to the firm that employs the carer. When considering payment for care at home, you will need to consider your tax position. In certain circumstances, these payments are treated as taxable income. You will need to discuss all this with your adviser before deciding where benefits will be paid. - Consumers must be told what their expected level of benefits would be if they pay no further premiums. 17. Your advisor or plan provider will have explained what happens if you stop paying your premiums. But sometimes premiums are stopped accidentally or by mistake; or you might choose to make your policy “paid up” this means stopping any further payment of premiums but retaining cover for a set level of benefits based on your past premiums. The plan provider must agree to contact you or your appointed representative if premiums stop, so that he can confirm what you want to do and to explain the consequences further. - Professional clinical assessment of the claimant’s health. 18. If you need to claim, your medical assessment will be carried out sensitively by professionally qualified people. Local Councils employ suitably qualified social workers or nurses to assess older peoples’ need for home care support or to go into residential or nursing care. The emphasis is very much on making sure properly trained health professionals are used, rather than someone more directly linked to the insurance company. When individuals question their assessment, another suitably qualified health professional will be available to give a second opinion. - Dedicated information and advice service. 19. Your plan provider will provide a dedicated telephone support service to advise you on any matter connected with your plan, including a claim. - Consumer’s GP will be notified by the plan provider when the plan is taken out, with the consumer’s consent. 20. It is always useful if your GP knows that you have a long-term care plan. This could be helpful in arranging care for you if you are critically ill, and not able to do so yourself. And it may help your plan provider to process your claim more quickly, if there was some medical information that needed to be checked with your doctor. ANNEX D Some questions you should ask before taking out a long-term care plan Immediate needs plans 1. What kind of care will I (and my partner) need? 2. If I/we need to go into a home, what are the annual fees and charges? How much do they increase each year? Can I afford to pay them from my pension, savings or other income? Is there a gap between what I can afford and the fees? How can I bridge this funding gap? 3. Can I/we get suitable care at our own home? What are the likely costs, both in adapting our home, and in paying for a professional carer? Can I pay for this out of my pension, savings or other income? If not, how can I bridge the funding gap? 4. What happens when I/we die soon after taking out the cover? 5. Does the plan depend on stock market or other investment performance to succeed? 6. Where can I/we get independent advice? Long-term care insurance plans 1. What am I insuring against? How likely is it that I/we will need long-term care? 2. Can I afford long-term care without taking out insurance? How dependent do I want to be on my family or the State? Do I want to leave my assets to my family? 3. Are premiums levels fixed? Will they go up in the future? 4. Are benefit levels fixed? Will they go up in the future? 5. Assuming I/ we have to go into a nursing home full time - this is the most expensive kind of care - what would be the premiums to cover those costs? Can I afford to pay out of current income? If not, what are my options? Can I cover a proportion of the costs through insurance? 6. What if I/we stop paying premiums? Are we covered, partially, or not at all? Can I/we cash in the policy? If so, what happens if I then need care? 7. What happens if the insurance company goes bust? Would I/we still be covered? 8. Where can I/we get independent advice? Both kinds of plans1. Who do I complain to if I don’t like the quality of the care I’m getting? 2. Are the firms or people selling me these plans authorised or regulated? 3. What comeback do I have if I later find that I’ve been sold a product that was unsuitable for my needs? 4. Will benefits be cash payments direct to me or to the care providers? Do I have a choice? 5. Have I got good value for money? Tips:
ANNEX E REGULATORY IMPACT ASSESSMENT REGULATION OF LONG-TERM CARE INSURANCE The issues 1. The sale and marketing of investments is regulated by the Financial Services Authority (FSA) under the Financial Services and Markets Act 2000 (FSMA), and its predecessor, the Financial Services Act 1986 (FS Act). As long-term care insurance contracts are often pure insurance plans without any investment element their sale and marketing is not generally regulated. 2. Long-term care insurance policies are attractive to a fairly limited group – generally middle-income groups or higher. Payments can account for a significant part of the income of those on lower incomes, partly because the long-term care they fund is itself expensive, and partly because the limited claims experience and a fairly small market means that long-term care plans do not yet offer the same value for money as some other products. As a result, those on lower incomes or with fewer assets, eg equity in their homes, will rely on local authority provision. The plans are expensive. The rich do not need them. The lower paid or those without equity in their homes must rely on local authority provision. 3. Long-term care insurance policies are generally affordable by only the better off or those with assets locked up in homes that can be released to fund care. At the end of 1999, only some 34,000 policies were in force. The highest earners or those with significant assets may have alternative means of making provision for these needs. 4. There is no evidence of significant consumer detriment. But such plans have only been on the market since 1991 and claims experience is still relatively modest. This is reassuring, but one cannot disregard the modest potential for detriment, at the point of claim. In particular, this could be at a time when consumers can be at their most vulnerable. 5. There are four groups of long term care plans: i. indemnity insurance policies paid for by either regular or one-off premiums which are presently unregulated; ii. single premium investment bonds, a variation of pre-funded insurance where the premium to pay for insurance is drawn monthly from the bond - regulated; iii. investment-based plans such as immediate needs annuities - regulated; and iv. home equity release plans - presently unregulated but, as first-charge mortgages, equity release plans will be covered by the separate regulatory regime announced by the Economic Secretary to the Treasury on 26 January 2000. 6. The average age at purchase is about 68 years, and about one-fifth are over 75. The Royal Commission on Long Term Care for the Elderly, together with the Treasury Committee of the House of Commons, and the Joint Scrutiny Committee on the Financial Services and Markets Bill (containing Members of both Houses of Parliament) recommended FSA regulation in order to provide protection to these consumers. 7. The Government has now responded to the Royal Commission’s Report. It decided that nursing care should be free, and to disregard a person’s home for the first three months of their stay, thus reducing pressure on a consumer to pay for non-nursing and accommodation costs from day 1. 8. It is rare that benefits are required to cover the whole cost of care. Rather they are needed to meet the expected or perceived gap between a person’s ordinary income eg from their pension, and what may be required to pay for care. 9. The Government’s decision on nursing care - as well as recent announcements on pensions and the minimum income guarantee - should mean that the cost of care to consumers is likely to be cheaper and people will need to insure for smaller sums. 10. A combination of all this, and the proposals for CAT standards might mean that more people may find long term care insurance affordable and attractive. For example, they may be able to afford (and be able to choose) a higher standard of residential accommodation or to ensure that at least some of a their life savings can be passed on to their heirs. Objective11. The objective is to extend consumer protection to those who purchase these plans, and so improve consumer confidence. Risk assessment12. Following the Government’s response to the Royal Commission Report, as well as the Chancellor’s pre-Budget announcements on state pensions and the minimum income guarantee, long-term care insurance may become more affordable and attractive to a wider constituency of people. This could lead to a rapid expansion in the number of policies sold. 13. If there are no controls in place, in terms of regulating the selling or marketing, or the information requirements of the products, consumers may be sold unsuitable and/or expensive products that might not meet their needs. 14. Consumers could, therefore, be paying substantial sums, but with the product not delivering either in terms of producing sufficient income to meet their requirements, or in a worst case, of not paying out at all because a particular disability is not covered.. The options15. Four options have been identified: Option 1 - do nothing and rely on industry to adopt benchmarks - the proposed CAT standards set out in the report of the Treasury’s Committee on Long Term Care Investment Products. Option 2 - partial regulation ie authorisation of plan providers, with a standardised disclosure regime. Option 3 - in addition to authorisation and disclosure, regulation of the selling and marketing of long-term care insurance ie full conduct of business regulation. Option 4 - regulation of the sale and marketing of all medical insurance plans (long term care insurance, critical illness insurance, permanent health insurance, and so on). 16. A discussion of these options is included in chapter 1.
Identifying, quantifying and valuing the benefits17. The Government believes that the benefits to consumers of regulation are: i reduced scope for mis-selling; and ii enhanced confidence, leading to additional purchases of suitable LTCI policies, possibly increasing competition in the market with consequent increase in the use of cheaper insurance plans and wider choice of care. 18. It is not possible to quantify the benefits at 17 i above. The LTCI market is very small with few recorded complaints. There is, therefore, no statistical evidence on the ratio between plans sold and complaints. All the Government can do is compare the costs of mis-selling in a similar scheme, such as the home income plan (HIP) scandal of the 1980s. 19. HIPs are a form of equity release scheme designed as a means for elderly people to release capital tied in their property. These schemes used the proceeds of a loan raised on the property to invest in a bond designed to provide sufficient returns to repay interest on the loan and additional income. Unfortunately the scheme was flawed and investors found themselves with rising levels of debt to their lender. Most lenders involved were building societies and the HIP plans were mainly sold through independent financial advisers (IFAs). 20. The sale of the investment bond is regulated under the FS Act and the regulators effectively banned HIPs schemes involving such bonds in the early 1990s. Investors were able to claim against their advisors who were required to return the capital invested. This led to a number of IFAs being declared in default by the investors’ compensation scheme, which paid any necessary compensation itself. £70 million was paid in compensation to 4,500 investors. 21. There is no suggestion that long term care insurance plans have been or are being mis-sold. In addition, the investment bonds were regulated under the FS Act so there were means of redress. But the same would not necessarily be the case in respect of long-term care insurance policies. Regulation would help prevent mis-selling and provide redress if problems arose, though not, of course, in respect of delivery of the benefits themselves. 22. Regarding 17 ii, on average, some 5,000 policies have been sold in the last two years. It is not possible to say how many additional policies will be sold as a result of the Government’s proposals in response to the Royal Commission Report, or following regulation. But if they need to claim, more consumers will have greater choice, for example, as to whether to have care delivered at home or on better quality care in a home. Business sectors affected23. Regulation would affect firms involved in marketing and selling LTCI. Some may already be authorised by FSA. Others would need to become authorised. The FSA authorised firms affected would be plan providers, tied agents, IFAs, and insurance brokers. Plan providers generally market their products through direct sales forces and IFAs, although other channels such as affinity groups may also be used. Regulation would also impact on private care homes assuming more people take out insurance and have the resources to pay for care. Competition24. At present, there are only some 14 firms marketing long-term care products. Regulation could stimulate the market and encourage more firms to develop their own plans, thereby increasing competition and reducing consumer premiums. This appears to be the view of both the industry and groups representing elderly people. 25. It is supported by the relatively low forecast costs of regulation, which would not represent a significant barrier to entry. The only obvious problem with this assessment would arise if the ABI estimate of the costs to plan providers of option 3 is broadly correct. 26. In such a case, the competition impact could well be negative, with new entrants deterred from entering the market. Some existing providers might be tempted to withdraw, given compliance costs that are relatively very high compared with the current size of the market. Compliance costs27. Additional costs of compliance are mainly direct, such as changing plan literature, supervision of firms, and management time in response to on-site visits from the FSA; and indirect such as the impact on competition and the effect on distribution channels through polarisation. Direct costs 28. The direct costs of compliance would affect plan providers, their direct sales forces, and IFAs. They include the requirement to seek permission as well as the application of conduct of business rules to the marketing and selling of LTCI plans. The latter may result in changes to plan literature, software, additional training and establishing an internal complaints mechanism. 29. Additional costs may also result from any new requirements imposed by the regulators. As certain LTCI plans already fall within FSA rules, it may be that few new requirements are needed. In addition, according to the trade body, the Association of British Insurers, plan providers sell and market their plans as if they were already regulated. If this were the case, the incremental cost of regulation ought not to be high. Indirect costs 30. Indirect costs such as higher prices for consumers might result if regulation created real barriers to entry and reduced competition. But with the industry selling and marketing LTCI as if it was already regulated, it is unlikely that FSA regulation would increase prices to any significant extent. 31. The small size of the sector suggests that the absence of regulation to date has certainly not stimulated a great deal of innovation to make plans attractive to a large number of people. Compliance costs for a typical business32. If option 1 is chosen, there would be no additional costs through statutory regulation either for plan providers of IFAs. 33. Option 2 is unlikely to mean many additional costs for the industry because the product providers are already prudentially regulated. They already comply with the industry code of practice. But there may be some costs in complying with FSA disclosure rules. There would be few, if any, additional costs for IFAs with option 2 as they would not need to seek permission and comply with FSA rules and make time for site visits. 34. For option 3, the ABI estimates that for a typical plan provider, the compliance costs may be of the order of £1 million. For a new, presently unauthorised plan provider, who wishes to sell long-term care plans, the ABI have said it could cost perhaps £3 million in one-off set-up costs and a further £1.5 million per annum. These figures seem quite high bearing in mind that the industry has told the Treasury that they market long term care products as if they were already FSA regulated. 35. The direct costs for IFAs would be limited as regulation of LTCI should only result in a change in status of one of the many plans they market. The main impact could be the requirement for a special qualification or further training in this area for qualified financial advisers. This is likely to cost some £2,000 per individual IFA. 36. Only some 200 to 300 IFAs are involved to any significant degree in the LTCI business, so the one-off costs might well be £400,000 to £600,000. There might also be on-going costs of £20,000 as IFAs will need to keep up to date with developments and may subscribe to a specialist information provider. 37. No estimates have been made for the costs of regulation under option 4. Consultation with small business: ”the litmus test”38. IFACare a group | |||||||||||||