Health insurance needs a cure

What is it about the insurance industry that makes it so loath to listen to other people? I ask the question following the publication this week of a report by the Office of Fair Trading (OFT), the Government's competition watchdog, on the subject of health insurance.

Health insurance covers four main areas: it pays for private care in hospital, for income replacement when a person becomes ill, a one-off lump sum payment on diagnosis of a range of critical illnesses, plus long- term care for those who can no longer look after themselves.

Two years ago, the OFT published its first report on the industry. In it, the OFT argued that the products on sale were difficult to understand and riddled with exclusions. It argued for "benchmark" products, whereby consumers could compare like with like.

Moreover, the watchdog pointed out, some types of policies - so-called "moratorium" ones - were potentially dangerous. Moratorium policies involve not having to give details of any previous medical history to the insurer. In return, pre-existing conditions at the time a policy is taken out are not covered for two years afterwards.

The OFT argued that one consequence might be that consumers with pre- existing conditions might be tempted not to seek medical care for them for two years so as not to invalidate their cover.

In any event, the OFT said, one side-effect of restricting information to an insurer was that premiums would be needlessly higher for many people.

It therefore suggested that sales of these products should be discontinued.

What was the insurers' response? To the proposal about benchmark products, the Association of British Insurers (ABI), the industry's trade body, said that this was not possible.

Strange then that over five years ago, following the urging of independent financial advisers, the insurance industry was able to come up with a standard set of definitions for critical illness policies.

As for moratorium policies: again, no dice. The ABI suggested simply that there should be better documents explaining the effects to customers.

The OFT's report this week acknowledges that its first report in 1996 failed to persuade insurers to shift.

What should be done now? The OFT wants the sale of moratorium policies to be regulated by the new super-watchdog, the Financial Services Authority. It also wants consumers to be given stronger warnings about potential price hikes.

But the OFT is too tame. This industry has consistently refused to control itself. It is now time for the Government to step in.

Here is an issue for Mrs Liddell, the Treasury minister. Labour, we are told, wants us to take responsibility for our own lives, which means more private insurance. If so, when will it bring health insurers to heel?