The Association of British Insurers' new guidelines on non-disclosure for long-term protection products have been heralded as a welcome step for the sector. Nick Kirwan explains.
In January this year, the Association of British Insurers (ABI) published its new guidance on non-disclosure and treating customers fairly on claims for long-term protection insurance products.
The guidance looks into further reducing the proportion of declined protection claims, and it covers the fair treatment of non-disclosure discovered at the point of claim. It covers the continuing fair treatment of claims for both new and existing UK life, critical illness (CI), income protection and other long-term protection insurance contracts, but does not apply to any general insurance contracts.
Crucially, it takes into account what consumers believe to be fair. Consumers want to ensure that their protection claim will be assessed fairly and paid promptly, while insurers want consumers to be able to take out protection plans with complete confidence. Importantly, the new guidance uses principles that have a clearer basis in law, and is closely aligned to the proposals made by the Law Commission. This should help make claims decisions more consistent.
Of course, the industry has been working hard on the issue of non-disclosure for some time now. In 2006, the ABI issued guidance on clarity of application forms, and in 2007 on telephone and online application processes. Both of these were aimed at preventing non-disclosure from occurring by ensuring that medical questions and risk warnings are clear, and that customers have every opportunity to disclose and check all the relevant information about their medical history.
However, while it is impossible to stop non-disclosure completely, this new guidance will ensure that customers are treated fairly if they make a genuine mistake. Consequently, only people who deliberately withhold information will see their claims automatically declined. The key to this is that those who make a genuine mistake will return to the same position they would have been in if they had provided the information in the first place - and the guidance contains detailed provisions to ensure that this is applied consistently to provide a level playing field.
To achieve this, insurers will now classify non-disclosure as one of three categories:
n Innocent - pay the customer's claim in full;
n Negligent - proportionate solution, so the customer is no better or worse off; and
n Deliberate or without any care - decline the claim and cancel the policy.
The key principle is that the severe remedy of declining a claim by cancelling the policy from outset should be used sparingly, and reserved for only the most serious cases of non-disclosure.
The overwhelming majority of cases are therefore expected to fall into the second category - negligent. This covers everything from an inadvertent mistake to gross or serious negligence. In these cases, a proportionate solution will apply, meaning that the customer will be no better or worse off as a result. As far as possible, the insurer will try to put the customer back to the same position as an identical customer who had accurately disclosed all the information, and who paid the same premium for the same type of policy.
To achieve this, the outcome will depend on what the original underwriting decision would have been. For example:
n If a higher premium would have applied, the insurer will work out how much cover the premium paid would have provided and pay this revised amount.
n If an exclusion would have applied to the cover, the insurer will only decline the claim if the exclusion would have applied to the cause of the claim. Otherwise, the claim will be paid.
n If no cover would have been offered at all, as the customer was not insurable when they took out the policy, the insurer will decline the claim and return the premiums in full.
The guidance contains detailed provisions to ensure that insurers apply this consistently and fairly.
Dispelling the Urban Myths
Everyone knows the old urban myth that when a policyholder makes a claim, the first thing the insurer will do is trawl through their medical records until it finds an ingrown toenail that was not disclosed, and use this to turn down the claim. Of course, this has never been true, but the new guidance should put an end to this myth once and for all.
The guidance contains detailed provisions regarding answers to questions that only apply to either total permanent disability (TPD) or waiver of premium when a customer makes a claim for another benefit type. Where this applies - for example, the non-disclosure of a bad back for TPD - it will not be used to decline a claim for another benefit, such as a cancer claim under a CI policy.
Insurers will continue to be fully entitled to investigate all claims to ensure they are valid. However, the guidance contains detailed provisions to ensure that insurers will only ask for relevant medical evidence required to validate the claim, and other medical evidence only where it is fair and appropriate to do so.
For example, take the case of someone who makes a CI claim for a large malignant tumour that, according to the medical advice, was likely to have taken around five years to develop. If the policy was only taken out two years earlier, the insurer should legitimately investigate whether there were any symptoms in the three years before the policy started if none were disclosed.
However, if an insurer wants to check someone's full medical records without a specific reason, it should be done when the customer takes out the policy, not when they make a claim.
The new guidance covers many areas not featured in previous advice. It should, therefore, be applied more consistently across the industry. Much has changed since the ABI issued its original guidance around five years ago, as the industry had relatively little experience of dealing with claims for CI insurance at that time. Since 2000, it is estimated that the industry has paid out more than £2.5bn in CI claims, gaining many valuable experience along the way.
Processes have also changed. Five years ago, most protection business used paper application forms, while now the majority of business is transacted online or over the phone - and who could forget the introduction of regulation and the Treating Customers Fairly regime?
In the light of all these changes, industry practice has also been evolving, and these changes are reflected in this updated guidance.
Incentive to disclose
An important consideration is that consumers must have an incentive to disclose all the relevant information. Importantly, no one can be better off under the new guidance by not doing so.
If anyone knowingly withholds any information they are asked to disclose, insurers are right to treat this as deliberate non-disclosure, decline the claim and cancel the policy. Insurers need to do this to protect the interests of all honest customers who would otherwise need to pay higher premiums. Accordingly, the new guidance is not a substitute for a policyholder filling in the application carefully, accurately and to the best of their knowledge and belief.
The guidance was published last month, and its principles came into immediate effect for all claims decisions, on all applicable new and existing policies. It also covers any claims decisions in the pipeline.
In addition, insurers have been working to ensure that all staff working on claims are trained and claims processes come into line with the new guidance. This work will continue until the new guidance is fully bedded in.
So what of the future? This marks an important turning point for the protection industry, as there should be fewer declined claims cases in the media - although it is optimistic to imagine that none will slip through the net. This is an important first step in improving consumer confidence.
Furthermore, it is likely that sales channels that result in better levels of disclosure will become financially more attractive, providing an important incentive for insurers to invest in these, and potentially offer more attractive premium rates.
Advisers may also start to feel more confident about writing protection business, without the fear of their client making a mistake that comes back to haunt them. There will be less of a need for people to supply their full medical records before taking out insurance. While this may be a good practice for a small number of cases, this was never going to be a viable solution for the whole market - it simply would not be scalable.
One thing that the market can be confident of is that consumer confidence will not improve overnight - perceptions take time to change. However, last year the industry paid more protection claims and covered more people than ever before, while it saw fewer cases referred to the Financial Ombudsman Service - proof that the situation is improving. This latest move will further change the number of claims paid out and, without any question, shows that providers are serious about winning consumers over. n
Nick Kirwan is head of health and protection at the ABI
