Articles

Towards single figure declined claims rates

Richard Walsh of SPPR Consulting looks at one of the industry’s major reputational issues — declined claims — and asks whether recent industry initiatives have now solved the problem, or if there is still more to do.

Sorting out the mess of excessive numbers of declined claims has been a mammoth task especially for critical illness insurance. One in five claims being declined meant a large number of customers were let down by the insurance industry at the most difficult time in their lives – when they became seriously ill and unable to meet their financial commitments. In the last couple of months it seems that the industry’s hard work to make things better is finally beginning to pay off, with most firms reporting big reductions in declined claims.

Some progress had been achieved through three initiatives:

• Improving the clarity of application forms – complex application forms are always going to cause problems for consumers but some of the forms that were in use were badly worded or asked questions that very few people could answer honestly in a meaningful way – the so called ‘memory test’ questions.
  
  
• Getting better disclosure by moving away from asking for medical evidence through application forms and using tele-interviewing instead. Here the underwriting outsourcing industry was particularly helpful in driving change.
  
  
• Making what is and is not covered much clearer, especially for critical illness insurance. People understand better what they have bought and so their claims are more likely to match what the policy pays out for.
  

But despite this, declined claims rates remained stubbornly high. The root cause of this was the guidance that was agreed with the Financial Ombudsman Service (FOS) on non-disclosure. Part of the problem was the FOS’s well meaning but misconceived decision to split the old category of negligent non-disclosure into two parts – inadvertent and clearly reckless. Their intention was to ensure that inadvertent non-disclosure would result in a proportionate payment and indeed it did. The trouble was that far too many non-disclosures fell (often by default) into the clearly reckless category. The other issue that the guidance did not really address was ‘non-disclosure shopping’ by which we mean companies automatically asking for full medical evidence. They always denied doing this but the lack of any systematic audit process meant those who wished to go down this route could do so and no-one would be any the wiser – except the person with the declined claim.

This year, the ABI published its new guidelines on non-disclosure for long-term protection products. They are clearly a significant improvement for consumers. The overriding principles are that ‘the severe remedy of declining a claim by cancelling the policy from the outset should be confined to the most serious cases of non-disclosure’ and that a proportionate remedy should be applied so that the outcome should be the same as if the non-disclosure had not happened in the first place. So let’s have a look at some of the detail.

The new rules on non-disclosure

First, the categories of inadvertent and clearly reckless non-disclosure have been merged back to the old category of negligent non-disclosure. As mentioned before, the distinction was created by the FOS in the first place and was becoming increasing difficult to justify – especially for non-disclosure unlinked to the cause of claim where a clearly reckless non-disclosure would have led to a declined claim. But all is not quite as it seems because a category of non-disclosure that would still result in an automatic decline – deliberate non-disclosure - has been expanded to include ‘without any care’. This was part of the clearly reckless category. It will be interesting to see how this works out in practice and the guidance does set some parameters.

First, the category does not apply where the customer has a credible explanation supported by the facts for having omitted the information or there are other credible mitigating factors. A typical example mentioned by the FOS where clearly reckless (and I guess without any care) may not apply would be where the applicant had done their best to give the right information but was not intelligent enough to understand the questions.

The second exception moves right into ‘planet insurance’ territory – ‘where the degree of materiality associated with the non-disclosure is relatively low and, in cases where a premium rating would have applied, the underlying risk premium rating resulting from the non-disclosed information in aggregate would not have been more than +50% (or £1 per mille) for the applicable life assured’. Try explaining that to a consumer or Watchdog. The aim is clearly to ‘let off’ more minor non-disclosure but the problem is that its minor or major nature is determined solely by its underwriting impact. Consumers cannot be expected to understand the detail of underwriting decision-making and there is not much evidence that what an average person would think is minor or major always tallies with what would impact on an underwriting decision. More work is needed here – and it will probably come through practical experience of applying this ‘rule’ and FOS decisions.

The guidance then comes back to earth with a well written section on the typical characteristics of deliberate/without any care non-disclosure where the category is defined, and there is a useful analysis of what kind of medical information is likely to be known to a consumer and be important for protection insurance. Unfortunately, it also states that non-medical information such as occupation, time spent abroad, smoking, alcohol and drugs are much more likely to be known as relevant. I wonder if this is really true?

Except maybe for income protection, who would think of a change of occupation as being particularly noteworthy?

Time spent abroad – only war zones like Iraq?

Smoking and drinking? As any GP will tell you, patients always underestimate their consumption. The move by many companies to zero tolerance for any smoking has not been fully tested. As for alcohol – hardly a week goes by without it becoming obvious that the relationship between the amount and of (and what is) drunk to number of units is unknown by most consumers. And the basis of the recommended weekly amounts, to achieve maximum healthiness - as opposed to avoidance of harm - is unrelated to morbidity and mortality risk. Although (to be fair) not many people know that.

Drugs – the mixed messages from Government — including the PM’s dismissal of the findings of its own expert advisory body on classification of cannabis — hardly help towards a shared public understanding of the relevance of smoking the odd joint.

Stopping non-disclosure shopping

A particularly welcome part of the guidance is on collection of medical information – which addresses the issue of ‘non-disclosure shopping’. The long-standing ABI/BMA guidelines are mentioned but it then goes further by stating that insurers should: 

Only ask for information needed to assess whether the insured event has occurred. 

Keep an audit trail of the reasons for requesting medical records.

Note that an early claim is not a reason by itself for asking for full medical records.

For IFAs, a key change is that where a non-disclosure results from their omission, as opposed to their action, they are liable. In the past, only the second situation resulted in liability for them. This will put IFAs under a lot of pressure to capture everything that was said – for example by recording their conversations.

Moving on, we come to the concept of severability of contracts for two or more products. Here the ABI has made another welcome change by making Total Permanent Disability severable, typically from critical illness insurance. However income protection has not been treated this way and as most IP claims are for bad backs or stress the problem of unlinked ‘non-serious’ conditions will remain. This begs the question about the warnings that are issued if, for example, IP is sold as a single contract with CI.

What is not covered

Finally there are three areas that are not tackled. The continuing duty of disclosure (after the policy is applied for and the consumer goes on risk) is still there. The guidance does say that the insurer must have a ‘robust case’ for using this but I doubt that any consumer really understands what this duty means. Some companies have dropped it altogether. Returning to severability, there is no mention of joint life policies. Some companies not only turn down the policy of the deceased in the event of a serious non-disclosure by them (fair enough) but also terminate the innocent spouse’s life cover. Again this is a practice that I doubt any bereaved person could understand. And then there is the non-contestability period advocated by the first Law Commission Report. This has disappeared without trace.

Overall, the message is upbeat though. In times of financial stress the importance of adequate protection insurance cannot be over-estimated. If declined claims can be brought down to single figures consumers will be able to purchase policies which do what they say on the tin – peace of mind when you need it most.

Richard Walsh, SPPR Consulting, {LinkExternal:www.spprconsulting.co.uk}www.spprconsulting.co.uk{/Link}

This article is an extended version of one that originally appeared earlier this year in Cover Magazine.