Growing pains of child cover

Ask a broker for insurance to cover you if your children get ill or injured and you are at their bedside so are not able to work and you'll get, at best, a shrug of the shoulders. More often than not you'll get ignored.

It's not completely the broker's fault.

Insurers don't offer such a product. They'll cover you, yourself, with a personal accident and sickness policy, income replacement or critical illness cover - or some combination of all three - but they won't cover the very same inability to work because your kids are in hospital or need nursing at home.

Yet the potential demand for this type of cover could be huge.

According the government's Small Business Service Analytical Unit, figures from the start of 2004 show that there are more than three million firms run by the self-employed, partnerships or sole directors who have no employees. That is nearly 73% of the entire UK private sector.

These businesses employ nearly 3.5 million people, which is almost 16% of all those in the private sector, and they have an estimated combined turnover of £190bn annually.

Firms employing one to four people add a further 766,105 businesses, which is about 18% of the total. They employ just under 2.3 million people, which is a further 10% of all private sector employees.

Combined, that is more than nine out of 10 of all private sector businesses employing more than one in four employees. More than two-thirds (71%) of small businesses described themselves as "family-owned".

The Federation of Small Business has 17,400 members in its husband-and-wife membership category - a privilege no longer offered to new joiners. And the FSB's preferred insurance broker, Warren Hill, now part of the Towergate empire, says its FSB phone lines virtually go dead during school holidays, suggesting many more of them have kids under 18.

According to the Office of National Statistics, one in 10 UK workers with dependent children are self-employed. That's not far short of 1.4 million potential customers who could lose out if their kids become ill or are injured.

There are some policies covering kids. Ace underwrites a policy sold through HSBC Insurance Brokers. Called Class Cover, it is a personal accident only policy and is sold through HSBC's education division, which also sells such cover to schools. Class Cover is primarily targeted at wealthy families.

Ace also has its own version, marketed direct through mailshots and a huge telephone cold-calling campaign, called Firstcover+.

This kind of insurance pays out fixed sums for permanent disability but most relevant is a daily benefit during hospitalisation of up to £100 a day for those taking the most expensive option.

Payment kicks in after the first three days and it has a maximum payment term of one year. It then provides free home nursing care through the British Nursing Association for four weeks and will pay £500 a month towards the costs of educating the child at home for every full month they remain off school for a further year.

In the first 11 months of 2005, HSBC says it had just 103 such claims out of a potential 50,000 insureds on its Class Cover policy.

Ace is more coy about revealing figures for claims but its premiums for the maximum benefit policy are just £6 a month for one child and £10.50 a month for two.

But both policies are accident only. A child getting sick would have exactly the same impact on family life and - for the self-employed - on their ability to earn the family's income, yet no such cover is available. So what are the risks?

Statistics
Hospital Episode Statistics (HES) is the national statistical data warehouse for England of the care provided by NHS hospitals and for NHS hospital patients treated elsewhere. It contains more than 200 million records.

Figures for 2004 show that, of the 66 main specialities in NHS hospitals in England, in just nine categories patients under 14 were responsible for half or more of the operations and the mean average age of patients was below 18 years of age. (See table below).

Only 'child and adolescent psychiatry' had a mean average hospital stay of more than a week.

The mean stay of 74.6 days combined with the median stay of 39 days suggests most children treated in this category require more than a week in care. But only 1,570 kids needed that treatment in England that year and more than 200 were day cases.

It is also unlikely that parents would be with their children during this treatment, so it could reasonably be excluded from this sort of cover.

There are cases where children require longer stays in hospital but they are far less frequent and for far shorter periods than may, at first, be thought.

Even big-name children's hospitals that only get to see those with the worst symptoms or most complex problems don't expect most children to stay for weeks on end.

London's Great Ormond Street Hospital has more than 13,000 inpatient admissions a year but an average stay of only three days.

Out if its 314 beds, just 30 are for intensive care, eight for high dependency and five for transitional care. Most children are in and out of hospital very fast.

The big detail is the percentage of emergency cases - more of these will be accidents rather than long-term illnesses.

At Great Ormond Street, of the 12,321 operations carried out, 82% were planned and just 18% were unscheduled, although some of these will have involved sudden worsening of illnesses rather than accidents. From the HES figures in the table, the average for emergency admission is a little over 16%. With psychiatric illness removed from the equation, emergency admissions drop below 15%.

Accident cover
At present, the only cover parents can buy is for accidents that lead to hospitalisation. But that leaves the self-employed exposed to the risks inherent in at least 85% of child hospitalisations.

Surely the same benefits can be extended to cover serious illness? Nothing in insurance is ever as simple as that.

Colin Toppin, accident and health manager at Allianz Cornhill Commercial, did his own statistical analysis and found enough gaps to make any underwriter shudder.

"There is potentially a market gap and, with kids, you are going to score a goal if you can fill it," he says. "But the difficulty with sickness rather than accident is underwriting for the individual."

Topping says underwriters will want to exclude pre-existing conditions in individual children and will have to exclude certain illnesses anyway. Then, he says, they will want to see if the age and number of children has any effect on claims incidence or duration.

There may be geographical concentrations of particular child illnesses that may demand postcode variations in premium. The benefits paid out and the excess periods may need to vary either for illnesses, for the individuals covered or for where they live. Just adding that kind of underwriting discipline to a product ramps up the costs of the cover.

Claims handling
Ian Gadstone, managing director at Towergate's PA and travel division, says insurers would have questions about how long it was reasonable for a father to be off work looking after a sick child.

One father may be a particularly doting parent with a very close relationship with his child who expects to be at home and carrying out much of the nursing, while another father may be content to return to work sooner.

"And even if you can decide what is reasonable, how do you police it?" he asks.

Allianz Cornhill Commercial's Toppin warns that a self-employed parent, perhaps having a poor time getting work, may end up better off staying at home or in hospital with their sick child.

"That's a moral position that underwriters would need to be mindful of," he says.

Kevin Horne is marketing development manager at Ace Direct Marketing UK. He thinks paying benefits only during hospitalisation and paying for home nursing only when needed, for one month maximum and by a nursing agency - with no money going direct to the parents - may get round some of the potential problems.

And it is something he is going to be talking to his underwriters about.

In Switzerland, the company has already included cover for children getting cancer - a class of cover the more mature child insurance market there demanded.

In the UK, sellers often face a backlash from parents cold-called to be offered even accident cover. Ringing them up and suggesting their little Jonnie could be struck down with leukaemia too is not the best of phone calls to make. The sales team gets accused of preying on parents' worst fears.

A direct mail shot to Ireland arrived just after a school bus crash, prompting Horne to receive a flurry of uncomplimentary letters by return post.

And that makes selling any new product that did emerge the major issue. Different horses for different courses is the advice of Christine Cryne, chief executive of the Chartered Institute of Marketing (see box right),targeting different purchasers with their own reasons for buying.

But brokers could be the winners. Even with a major marketing and promotion campaign, brokers may be the best route for selling this kind of cover. Horne says the latest set of suitable telephone targets for his accident policy totalled just 1.2 million but the numbers are falling as more of the discerning buying public use the Telephone Preference Service to banish those calls from those unwanted insurance sellers. A new route to market - through brokers - is attractive.

Brokers also have a duty under FSA rules to point out to clients the gaps in their cover.

That may make introducing the risks of their children having an accident or getting sick a more palatable experience than a cold call, upping acceptance rates. If people have come to discuss their risks, introducing another they had not thought of in an unemotional way, could help clinch a sale.

But group deals would almost certainly be the most attractive proposition. Insurers are wary of the self-employed because past experience has been painful.

"On the adult PA business, the underwriters get panicky about the self-employed - the person goes bust and then we end up with claims for years," says Horne.

Toppin agrees. "Potentially, insurers can be selected against by the self-employed, with those knowing they are the most at risk taking it out while the safest risks don't bother."

Toppin says Allianz Cornhill Commercial is looking almost exclusively at partnership and affinity deals.

If a policy can cover a whole group, rather than the self-selecting individuals who almost know they are going to claim, then it spreads the risk, reduces the costs and makes it a viable option.

And PA is an attractive proposition for insurers. According to ABI statistics, in 2004 gross written premiums were £4,895m but gross incurred claims were just £2,916m.

That's a claims ratio a lot of underwriters would salivate over.

The real problem, however, is that the likely actual sales for any new product covering children will be too small to interest an insurer. The fault of this, according to insurers, lies with brokers. If an insurer launched the right product tomorrow, backed by a targeted and successful marketing campaign, few brokers would even mention it to their clients, let alone push it. The record of brokers selling PA is appalling, insurers say.

Perhaps insurers are doing too little, too late but most PA providers are urging brokers to use PA cover to gap fill for individuals under their more onerous FSA requirements.

A similar child cover could close that gap further. Because right now, if someone asks "Who's looking after the children?" the insurance industry's answer remains: "Not me". IT