Non-disclosure, declined claims and society's attitude towards them were at the forefront of Scottish Re's latest research. Warren Copp examines the results.
Q. Non-disclosure has been a key concern for the industry for a long time. But how serious is it?
A. The research, which questioned 1,000 people in July 2007, has clearly identified a high level of social tolerance of non-disclosure - where consumers think it is acceptable to not tell the truth when they apply for insurance, but still expect their claim to be paid and do not want to pay significantly higher premiums.
In practice, instances of non-disclosure are due to a combination of factors. For example, the typical protection sale environment is not exactly conducive to drawing out disclosures as it often occurs at the end of a long mortgage application and information-gathering process. The protection application process itself has, of late, also become longer.
Traditionally, it has always been up to the intermediary to ask questions clearly and to emphasise non-disclosure warnings. The use of data collection forms and re-keying of disclosures into electronic underwriting systems have extended the part the intermediary plays in the submission of accurate information to the insurer. The emergence of confirmation schedules has been a positive step, giving the applicant the opportunity to reflect on the answers submitted on their behalf.
The questions asked on application forms and the non-disclosure warnings provided are now much clearer. But, while applicants are asked clear questions to establish the required information, in many instances they have answered multiple questions inaccurately. A deliberate intention to mislead often appears to be the only valid explanation for this.
The issue of whether applicants understand their own medical histories has always been a matter of debate. A number of companies have recently carried out parallel tests where full tele-interviews and GP reports are obtained on the same lives. The results have been striking and show that the two kinds of underwriting evidence are comparable in terms of the information they provide, demonstrating that applicants generally understand their medical histories.
Q. A lot of progress has been made recently with improving sales processes for protection business. But does this mean the industry should be able to prevent non-disclosure at the point of sale?
A. It is certainly possible to design processes that draw out more disclosures from applicants. In particular, tele-interviewing has shown that asking an applicant questions away from the point of sale does improve disclosure rates. This is due to a combination of factors:
n Having a shorter stand-alone process focused on information collection and emphasising the importance of answering carefully.
n Offering a less embarrassing environment to disclose medical information away from the intermediary and other applicants.
n Skilled questioning techniques.
n Applicants being aware that the conversation is being recorded and archived.
Aside from tele-interviews, the widespread use of electronic application forms has led to a practice of issuing confirmation schedules, which summarise the answers submitted by the applicant. This offers the applicant the chance to consider their answers away from the sales process and leads to additional disclosures.
Non-disclosure studies show varying levels of disclosure by different sales channels and sources of business. This emphasises the key part played by intermediaries in encouraging disclosure.
The improved availability of non-disclosure data will gradually lead to insurers being able to identify and resolve the sources of non-disclosure more easily.
Q. It has been suggested recently that one option would be to get full medical information at underwriting stage and then offer a guaranteed payment. Is that the answer?
A. Getting full medical information during underwriting could lead to claims guarantees. The question of whether this approach will become mainstream depends on whether the increased costs of offering the guarantee (including obtaining the medical information) and the longer underwriting process will be balanced by the perceived value of the guaranteed payout when an intermediary places the business. It seems likely that this approach will work best with larger sums assured.
Offering guarantees will pose some difficult practical challenges. Experiences with claims handling have shown that GP reports obtained at the underwriting stage often do not provide a full and accurate summary of an applicant's medical history. To offer a full guarantee at an acceptable price, insurers may have to obtain complete medical records during the underwriting process.
In addition, full medical information simply may not be available on some lives as, in practice, not every applicant has a full set of medical records to access.
Saying that, a claims guarantee has the potential to be an attractive product feature and it is possible that this will emerge in the market in some form.
Q. The Law Commission has proposed changes to the law governing assessment and payment of claims by insurers. But why did it regard this as such an important area - was it a response to the problems around non-disclosure?
A. Fundamentally, the Law Commission is reviewing a law that is simply out of date. It is likely that some of the concerns relating to declined claims acted as a catalyst for the Commission in instigating its review.
However, the most important point is that the Commission has shown that it is willing to engage with, and listen to, the industry, which is a very positive sign.
Q. Claims declinature rates appear to be falling. How has this been achieved and does it mean we have solved the problem?
A. The number of declined claims has started to fall. Along with the work being carried out to reduce non-disclosure at underwriting stage through initiatives such as tele-inteviewing, there is a growing acceptance that the industry could offer the policyholder the benefit of the doubt on the most borderline examples of non-disclosure uncovered at claims stage.
On one hand, decisions to decline claims have always been in response to more severe non-disclosure. The life industry has worked with the Financial Ombudsman Service to develop processes that offer the applicant the opportunity to explain why the non-disclosure happened, and to provide a fair and consistent outcome.
On the other hand, the industry needs to make sure that the typical consumer understands the decisions it makes since even a very small number of declined claims can have a disproportionately negative effect on the trust that consumers have in insurers through negative media coverage.
The point at which non-disclosure reaches a level of severity that warrants the policy being voided from inception is a key area. According to the Scottish Re research, consumers support paying a slightly increased premium in exchange for an insurance claims adjudication approach that offers 'the benefit of the doubt' in very borderline cases.
Q. The cost of insurance is based directly on how many claims insurers pay out. A major factor in the amount of claims paid is how tough insurers are on missing or incorrect facts supplied by applicants. What do you think is the best balance for insurers to take?
A. In principle it seems reasonable for insurers to focus purely on the type and severity of the non-disclosure rather than the cause of the claim when making their decision. However, it is becoming clear that in an environment where consumers are generally uncomfortable with life insurers declining claims, they expect a tangible link between the original non-disclosure and the cause of a declined claim.
Q. A person who was diagnosed with cancer six months ago applies for life insurance. Despite being asked clear questions regarding their medical history they do not tell the insurer about the diagnosis. After their life insurance has been in force for just three months they die and a claim is made. Should the claim be paid out?
A. A concession in the area of non-linked claims may make sense, even in circumstances where non-disclosure is clearly evidenced. This would improve the alignment between consumer expectations and industry practices.
Q. One of the key Law Commission proposals was to introduce contestability limits. Do you think these would help?
A. Applying contestability limits should not be the absolute priority. In practice, the vast majority of declined claims tail off at around the five-year mark.
That said, non-contestability is attractive for consumers and there is a logic that says that if insurers decline few claims after five years then why is it that the majority cannot apply a limit? The research identifies reducing consumer tolerance for insurers declining claims as the period over which premiums have been paid increases.
Even at five years an absolute cut-off could result in anti-selective purchasing behaviour. Maintaining protection for insurers against the most extreme, clearly deliberate, non-disclosure after the limit expires would be important.
Q. What are the next steps for the industry and are you confident it can achieve them?
A. The situation is beginning to look more positive. The regulator's Treating Customers Fairly initiative is genuinely changing the way that insurers look at the way they do business. Companies are more focussed on reducing non-disclosure before it happens through initiatives like tele-interviewing. The recent fall in claims declinature rates is a good sign, although maintaining this progress must remain a major objective for the industry.
An adjusted industry approach to the hand-ling of borderline claims would be a sensible concession to align industry practice more closely with customers' views. The industry needs to avoid letting its treatment of a small minority of claims negatively impact on the way that the life industry is viewed by consumers.
In turn, this would provide an even greater incentive for insurers to reduce non-disclosure before a policy is taken out, by creating under-writing processes that encourage full disclosure. From an underwriting and claims perspective this is likely to prove a key battleground between providers over the next few years.
The industry, however, faces a major longer-term challenge to educate consumers in relation to the costs of subsidising non-disclosure and fraud and it would be good to see specific initiatives undertaken in this area. n
Warren Copp is chief underwriter at Scottish Re
