Insurers off critical list

Plans to change radically the way products such as critical illness insurance are policed have been abandoned after warnings that they could leave many homeowners inadequately protected.

The financial services authority's u-turn, announced yesterday, was welcomed by insurers and financial advisers.

The FSA is to regulate general insurance from January 2005, and it originally proposed that critical illness cover, private medical insurance and income protection insurance would all be classified as "higher risk" products.

This would have made it harder for advisers to sell these types of insurance and would have driven up premiums, the industry claimed.

The FSA said yesterday that "in response to feedback" it had decided that the three types of cover would not be classed as higher risk. Instead, there would be rules "aimed at addressing particular risks, which can arise across all types of insurance".

Critical illness cover is often sold to homebuyers when they take out a mortgage and pays out if the policyholder suffers a specified serious ailment such as cancer or a heart attack. Sales of such policies have soared: of the 6m in force, 1.2m were taken out last year.

At present, critical illness cover is classed as a low-risk product.

Legal & General, one of the leading providers, said the FSA announcement was "a good result for consumers". It had warned that if the rules were made more onerous, mortgage advisers would no longer promote critical illness cover, which would have meant "large numbers of homeowners and families being left inadequately protected".

This in turn would undermine work undertaken by the government to create a better safety net for homebuyers with the aim of reducing repossessions.

Jason King at specialist insurance broker Life Policies Direct said: "This allows critical illness insurance to continue to be available in the high street to the general public."

An FSA spokeswoman said that in future all firms selling general insurance would have to disclose "significant and unusual" exclusions to their customers. The regulator has also decided that long-term care insurance is to be regulated as an investment product.