As the industry steps up efforts to ensure full disclosure of information at application stage, Phil Brown explores how underwriting can be made more effective
There has probably never been a time when life insurance underwriting, and claims assessment and payment, have been under greater consumer and media focus. Equally, the protection industry has sought to become more transparent in its underwriting processes, and in its claims payment record.
Consumers have a right to have valid claims paid swiftly with a minimum of fuss. Equally, they and their financial adviser expect a quick and easy underwriting process and policy issue. And what life insurer would not want an expedient, cost effective, efficient underwriting process combined with an excellent track record for quick payment of valid claims?
However, problems arise when the balance of knowledge between insurer and applicant is threatened. If there is pressure to underwrite quickly, or a demand for less questions on medical history, there may be a risk of insufficiently prudent underwriting, which increases the potential for non-disclosure. That in itself has negative implications for insurers and consumers who lack the confidence of claims payment at a time when they are most financially vulnerable.
In 2005, the Law Commission and Scottish Law Commission announced their intentions to review insurance contract law. They were particularly concerned to address, among other areas, non-disclosure, misrepresentation and pre-contract information.
Since then, the industry has seen a succession of consultation papers and proposals covering such topics as:
- The introduction of a non-contestability period for life insurance claims.
- Abolishing the consumer's duty to volunteer information.
- A revised test for materiality in misrepresentation cases based on 'the reasonable insured' rather than 'the prudent insurer'.
Some of the proposals raised questions. For example, the abolition of the duty to disclose in relation to consumers and replacing it with an emphasis on insurers to ask specific questions, raises the potential for more questions on application forms which would lengthen the data gathering process. On the face of it, the move on materiality to 'the reasonable insured' encourages an approach that considers the consumer's perspective if claims are disputed. However, that does not alter the requirement for customers to take reasonable care to answer questions accurately and completely.
What's what
Earlier this year the Association of British Insurers (ABI) issued guidance on non-disclosure for long-term insurance products which changed the categorisations of non-disclosure and the remedies open to insurers. The guidance goes further than the Law Commission proposals detailing what should be classified as negligent and deliberate non-disclosure. Significantly, 'inadvertent' non-disclosure is removed in this guidance and critical illness will be the major focus of interest in terms of impact on claims payments.
The ABI classification of non-disclosure makes reference to the following categories:
Innocent: Pay claim in full
- The customer has acted honestly and reasonably in all of the circumstances, including the customer's individual circumstances but only where these were known to the insurer.
- In the circumstances, a reasonable person would have considered that the information was not relevant to the insurer.
- The non-disclosure would have resulted in a different underwriting outcome.
Negligent: Apply a proportionate remedy
- Applies where the non-disclosure resulted from failure to exercise reasonable care. This includes anything from an understandable oversight or an inadvertent mistake to serious negligence.
- In the circumstances, a reasonable person would have known the information given was incorrect and was relevant to the insurer.
- The non-disclosure would have resulted in a different underwriting outcome.
Deliberate or without any care: Void the policy, decline the claim and cancel the policy from inception
- Only applies where non-disclosure was deliberate or without any care.
- On the balance of probabilities, the customer must have known the information given was both incorrect and relevant to the insurer, or the customer acted without any care as to whether it was either correct or relevant to the insurer.
- The non-disclosure would have resulted in a different underwriting outcome.
Some observers feel this means only the very serious non-disclosures will result in non-payments of claims and policy cancellations. More proportionate claims will become increasingly common and the industry's decline rate will drop. It is still early days and insurers and reinsurers are avoiding a move on rates to reflect any increased claims payments. Those who are prepared to speculate quote potential future increases ranging from 0% to 4% or even 5 %.
At this relatively early stage it is clear insurers will want to ensure underwriting rigour is at a level that minimises non-disclosure and disputes at claim stage. However, the secret to a truly successful response to the changing arena may require insurers and underwriters to take a fresh look at the underwriting process.
One glimmer of hope in restoring the balance of an effective, time efficient underwriting process, with claims payment certainty in the event of a valid claim, may be tele-underwriting.
This concept has been in the UK market now for some time and is increasingly perceived as a way to shorten the underwriting process minimising dependence on GP reports, most significantly, improving disclosure at underwriting stage. Some argue it provides a sensible way to engage customers and reinforce the importance of full and accurate disclosure.
There are a number of different levels of tele-underwriting ranging from phone calls to customers when there is missing or ambiguous information on application, through to the broader model of so called "big T-tele-underwriting", where the applicant is asked all relevant questions in the application process. Expectations from the various versions of tele-underwriting have grown over time, and there may be benefits in terms of more liberalised non-medical limits and improved reinsurance terms. What is certain is careful monitoring for any unexpected consequences of deployment of a tele-underwriting model will need to be undertaken. Not all financial advisers want direct insurer contact with their clients, and not all life insurance applicants will want to talk to the tele-underwriter or any of their related staff.
Getting along
In the meantime, insurers continue to explore how they can maintain sensible underwriting rigour, avoid unexpected poor claims experience and provide customers with peace of mind that valid claims will be paid quickly with minimum fuss. The industry has already seen some ideas put forward in exchange for either higher premiums or very comprehensive underwriting at new business stage. This has caused some debate and a potential conundrum when considering the need to treat customers fairly. One view is that such a move makes a mockery of the existing offer to customers where the insurer already seeks to guarantee payment of valid claims.
Looking ahead, the spotlight will continue to shine on underwriting and claims payment, and the industry needs to ensure it embraces sensible change, avoiding knee-jerk reactions that reduce consumer confidence.
Phil Brown is underwriting and claims director at Zurich UK Life.
