Long-term care insurance (LTCI) contracts
last updated April 2006
LTCI contracts have been marketed to meet demand for an insurance product which will cover the costs of consumers’ long term care, such as nursing home or similar expenses. Various types of product have been issued:
- Pure protection contracts with variable premiums to cover the cost of insuring the risk each year, and no investment element;
- Hybrid contracts which have an investment element which is either:
- Separately identified as an investment fund paid for through regular or single premiums, which is used to meet the cost of insuring the risk each year (sometimes called a bond); or
- Not separately identified from the insurance element; typically there is a single premium which pays for the estimated cost of the insurance over the customer’s lifetime (sometimes called a plan).
The terms of the contracts vary between providers and depend on the options selected by the purchasers. Typically, the contracts provide for reviews of the insurance charges and, where there is a separate investment fund, of the funding required to meet those charges.
Contracts were issued in substantial numbers in the 1990s, but the number of new contracts sold is now very small. Many of the product providers were based offshore so that some aspects of their activities may be outside the jurisdiction of the FSA and the Financial Ombudsman Service, but sold the products through UK intermediaries. Contracts taken out some time ago have now passed their review dates, and some customers have been asked to pay substantially more to maintain their cover and informed that there may be further increases at subsequent review dates.
The Financial Ombudsman Service started receiving complaints about these products in late 2004 and raised the matter with the FSA under the wider implications process. After considering the issues, the FSA and the Ombudsman Services concluded that the cases raised wider implications about the way these products had been designed, priced, marketed, and administered, particularly through the periodic reviews of insurance charges and funding where there was a risk that the reviews had been carried out in a way that moved the goal posts for customers.
There was also evidence that these products have been mis-sold in some cases, although the number of complaints received by the Ombudsman Services so far has been small. There was a concern given the nature of the contracts, the options at review and the circumstances of the customer base that elderly policyholders might feel less able or might otherwise be less likely to complain than other consumers, which could be relevant in dealing with systemic mis-selling by a particular firm. However, the FSA did not consider that the way these products had been sold more generally raised a separate wider implications issue requiring specific regulatory action. The FSA considered that any mis-selling would best be dealt with in the first instance by the Ombudsman Services continuing to deal with individual cases and by incorporating their findings into the FSA's normal supervisory work.
In relation to the wider implications issue, the FSA decided on a programme of regulatory work involving the following areas:
- Thematic work – The FSA's regulatory response involved working with product providers and intermediaries to deal with the issues on a thematic basis – for example, focusing on review clauses and complaints handling.
- Fairness of review clauses – Review clauses in long term insurance contracts were considered in May 2005 in the FSA’s Statement of Good Practice covering fairness of terms in consumer contracts. The FSA had already discussed the issue of review clauses in LTCI contracts in Consultation Paper 200 and Policy Statement 04/14. The FSA is of the view that review clauses in general are not in themselves necessarily unfair – this will depend on the precise drafting of the clause including, amongst other things, whether the clause may operate only for the benefit of the firm. However, the FSA has made clear that it expects the firms involved to treat their customers fairly (including drafting fair review clauses) and ensure that their customers are properly informed about the implications. There is an FSA Factsheet that explains how consumers may spot a contract term that might be unfair and how to complain about a contract term to the FSA. The FSA has enforcement powers under the Unfair Terms in Consumer Contracts Regulations 1999 as well as the Enterprise Act 2002 which it will use if this proves to be necessary. The FSA's Consumer Web Pages provide more information on the unfair terms issue and the work of the Consumer Protection Powers Team.
- Operation of review clauses – A key issue for the FSA is whether firms are and have been operating the review clauses fairly in practice. FSA supervisors have looked and will continue to look at the operation of review clauses by product providers to consider if they are being exercised fairly. The FSA's approach, which in some cases may require consideration of the original design, pricing, and marketing of the products, is to ensure that the review is being carried out on a basis consistent with the bargain originally offered to customers. Where the FSA has identified deficiencies in the marketing or administration of these products, product providers have agreed to adjust their reviews or otherwise compensate all the customers affected.
Except in some cases where the FSA is taking specific action involving a firm, the Financial Ombudsman Service will continue to deal with those complaints that are referred to it. In considering individual cases it is likely to need to consider whether the product was or was not suitable for the customer and whether the terms of the policy were fairly represented at the point of sale.
The FSA and the Financial Ombudsman Service continue to liaise over the number and nature of complaints received about LTCI contracts. The information will inform the FSA's regulatory action against firms with poor standards of advice and complaints handling.