While non-disclosure is one of the main reasons a claim is declined, consumers still do not think they should be rejected when the facts left out are non-linked, writes Warren Copp
Claim declinature rates have become an increasingly topical issue in the UK life market. The publication of declined claims has improved transparency, but has also highlighted an increasing trend in the percentage of early duration claims declined for non-disclosure across all product lines.
Definition failure often contributes to an overall rejection rate approaching one in four claims for critical illness. The Association of British Insurers believes that declinature rates are too high and has been taking action to reduce them through its publications on clarity.
Against this background, the relatively limited routine medical underwriting carried out in the market has fuelled accusations of underwriting through claims management.
The industry approach to under-writing and claims management is coming under increasing external scrutiny relating to the treatment of customers, most recently from the Law Commission. Industry debate has intensified around the need to reduce claims declinature rates, and the best approach for achieving this aim.
Fairness
To contribute to this debate, Scottish Re recently conducted some consumer research to test public perceptions of 'fairness' in the context of underwriting and claims management. The results highlight significant gaps between customer expectations and market practice in some key areas.
The principle of 'utmost good faith' forms the cornerstone of insurance contracts.
The practice of declining or limiting claims payments for inaccurate information provided by the applicant at underwriting stage is clearly, therefore, a key area to explore in terms of consumer perceptions of fairness.
One of the questions the research, which polled over 1,000 people in November 2006, asked was whether insurance companies should be allowed to reject a life insurance claim if important facts were not provided by the customer when the policy was taken out, despite clear questions being asked on the application form (see pie chart below).
Perhaps the most striking conclusion is that 46% of all respondents believed that claims should always be paid either partly or in full, no matter what.
The other half were more comfortable with the concept of declining claims payments in full for non-disclosure. Only one in eight respondents, however, would support claims being declined due to non-disclosure that was not linked to the claim.
The particularly topical area of non-linked claims was investigated further by the question: if a customer lies about smoking when applying for life insurance, despite being asked a clear question on the application form, which of the following causes of death do you think justify payment being rejected?
Three quarters of respondents believed that insurers should decline lung cancer claims where smoking was non-disclosed. However, as the cause of claim became more remote from the original non-disclosure, respondents became less comfortable with claims being declined. Overall, there was a clear consensus that claims should only be declined due to linked non-disclosure.
In practice, claims management has been tightened recently in the area of non-linked claims.
Market pressures have increased the percentage of claims investigated for non-disclosure, and the extent of this investigation.
Investigation of claims is typically very thorough in the first five years after inception and even beyond this period significant investigation activity is often carried out.
Contestability period
One of the key proposals in the recent Law Commission report is the imposition of a three-year contestability period. Contestability periods limit investigation and management of possible non-disclosure to a fixed period after policy commencement.
The Scottish Re research tested opinions about the timescale over which life insurers should be allowed to reject claims, by asking consumers how long after a policy starts should providers be allowed to reject a death claim if important facts were not provided by a customer when the policy was taken out.
Three quarters of respondents believed that, as a minimum, insurers should be restricted by time from commencement of cover when investigating claims.
Over 60% felt that this time limit should be no more than three years. Equally, of the 59% of respondents who were comfortable with the concept of insurers declining claims for non-disclosure, nearly two-thirds preferred a time restriction of five years or no restriction at all.
These findings are of relevance to the current industry debate relating to the application of contestability periods in the UK market.
Importantly, over one-third of respondents did not believe that insurers should decline any claims for non-disclosure. This finding further emphasises consumer discomfort with the principles of disclosure and insurance.
Reliance on disclosures made by customers during the underwriting process is increasing in the UK life market. The Law Commission report proposes restrictions on an insurer's ability to rely on customer disclosures and still retain the right to take action against non-disclosure at claims stage.
Medical information
Insurers often accept requests for life insurance based on medical information provided by customers on their application forms. The Scottish Re research also asked consumers what they thought about this.
Almost two-thirds of respondents believe insurers should not rely on customer disclosures (in isolation) to underwrite. This is clearly at odds with current industry practice. Most business in the UK is underwritten without routine medical evidence.
So who pays for non-disclosure? Much of the debate relating to high declinature rates has centred on the potential for increasing market premium rates together with an adjustment to claims practices and a consequent increase in the percentage of claims paid.
This concept of subsidisation of non-disclosure by the wider consumer base was addressed in the survey.
Over three-quarters of respondents were unwilling to subsidise the cost of additional claims due to non-disclosure by others.
This striking finding is in direct contrast to the apparent social acceptance of non-disclosure that was highlighted in answers to earlier questions.
The industry needs to address the issue of claim declinature rates. As a key part of this process the sector has the opportunity to involve customers and to look for ways to align practices more closely with their views.
The Scottish Re research indicates a significant misalignment between some current industry practices and customers' attitudes. While current industry practices relating to non-disclosure are not obviously unfair, perhaps it needs to be questioned whether the industry should base its approach on its own perceptions of fairness or on those of the customers.
Consensus
Responses suggest that consumers are uncomfortable with the concept of voiding cover for non-linked claims. Consumers also appear to favour some form of time restriction when insurers investigate claims. Both areas are already the subject of significant industry debate.
The survey findings also highlight a clear message relating to reliance on answers from customers during the underwriting process. Insurers must be confident that their use of medical information provided by customers will be considered fair and reasonable.
Perhaps the most remarkable results from the survey relate to a third of respondents believing that all claims should always be paid in full. This is clearly an unrealistic position, particularly given that the vast majority of respondents are unwilling to pay the cost of additional claims in their own premium rates. This paradox may be impossible to eliminate completely, but it may be valuable for the industry to communicate more clearly to consumers the implicit cost of subsidising non-disclosure and fraud.
Both consumers and providers favour practices that strike a reasonable balance between paying claims and punishing non-disclosure. This lies at the heart of the concept of 'fairness', on which the principles of insurance are based.
Extended consumer research at industry level would provide a valuable opportunity to explore some of the messages highlighted above in more detail. The issues at stake here relate directly to the concepts of fairness and trust, which are fundamental to the sustainable operation of insurance business.
The industry needs to do more to understand the expectations and perceptions of our customers in this crucial area before deciding on future policy.
Warren Copp is chief underwriter at Scottish Re
