One of the biggest problems facing the protection industry is trust. Russell Whitworth outlines the need to provide customers with value, while equally tackling non-disclosure
The article "Coming Clean", from January's edition of COVER, affirmed that there is a mismatch between the claims the protection industry pays out and consumer perception of what is fair.
The most worrying conclusion, from an insurer's point of view, is that 46% of the consumers who took part in the Scottish Re survey reviewed in the article believe claims should be paid in full or in part, whether or not there was any non-disclosure. This is clearly some way from where the industry stands, and there is great potential to educate consumers on the unforeseen impact of this belief.
In addition, 36% of the consumers surveyed believe claims should only be declined for non-disclosure if it is directly linked to the cause of the claim. It is clear that the amount of claims paid where there is unrelated non-disclosure is key to the debate around what is 'fair'. What many people may not realise is that, under certain circumstances, the industry also pays claims where there is non-disclosure linked to the cause of that claim.
If a customer does not disclose medical history that would have resulted in the application being declined or postponed, claims on such policies tend to be declined. The industry should not pay claims on policies where the customer was uninsurable at application, albeit that they managed to get cover due to non-disclosure of material facts.
Of the claims that Legal & General declined due to unrelated non-disclosure in 2006, 80% of customers had an opportunity to disclose against more than one question at application. This supports the fact that consumers do get a fair chance to fully disclose. Even when this does not happen, the industry pays claims where the non-disclosure had no effect on the application terms.
The Association of British Insurers (ABI) claims flowchart, which Legal & General uses as guidance on what claims should and should not be paid, is the agreed industry standard. However, there is scope to clarify what should happen in scenarios that are not clear cut.
Such a scenario is where unrelated non-disclosure would have resulted in the policy costing more to the consumer. If the assumption is made that the policy would have gone ahead irrespectively, then a proportionate claims payment appears appropriate.
Conversely, if the assumption is that the policy would not have gone ahead, a claims payment appears inappropriate.
This is all notwithstanding that non-disclosure needs to be categorised as either inadvertent (resulting in more claims being paid) or reckless (resulting in less claims being paid). There are also innocent and fraudulent categories, although these do not generally cause debate about fairness as they tend to be clear cut.
The two case studies (see boxes) illustrate the difficult judgements that have to be made at claims stage. The industry needs to make sure that fairness prevails and that valid claims are paid promptly.
A key point to note is that consumers may change their behaviour in future by becoming more complacent at application if the industry starts to pay out more claims where the customer has been clearly reckless in answering the questions.
Alternatives
It could be argued that the industry should pay more claims regarding unrelated non-disclosure so that the consumer perception of what is fair increases. However, if the industry was inclined to pay such claims, the cost of cover would have to go up.
The dishonesty or lack of care of a minority of consumers would therefore result in the majority of honest consumers paying more. To fully understand this, an appreciation of the pricing basis for products is required.
To provide value for money, term assurance, which pays out on death of the policyholder, is priced on the assumption that only a certain number of customers of a particular type will claim in a 20-year term. Paying claims that are not valid is clearly unsustainable. A knock-on effect is that the protection gap may widen if prices go up.
The ABI, in fact, published guidance in February 2006 on application clarity that gives sensible and straightforward advice.
The industry does stress the importance of full disclosure at the application stage. For example, the wording on Legal & General's application is unequivocal: "Please remember that failure to answer the following questions truthfully and accurately will very likely mean that a claim will be declined and the policy cancelled". This warning is repeated on every single page where there are relevant questions.
Innovations
One possible innovation to protect people from potential non-disclosure is tele-medical interviewing, where the insurer speaks to customers over the phone regarding their medical history. This, with the aid of conversation management techniques, can increase disclosure levels and give more certainty of claims payment.
The industry needs to make sure that it is striking the right balance between claims it should pay (based on providing value for money to the majority of people) and the consumer perception of what is 'fair'. The industry must not forget that it is here to pay claims and that it does want consumers to have confidence it will pay eligible claims when needed most.
Russell Whitworth is claims and underwriting director at Legal & General
