Law Commission: Body's proposal for five-year cut-off period on life cover panned
The summer lull that usually sends the insurance industry to sleep from early July was disrupted in the middle of last month when the Law Commission published its latest paper on insurance contract law, writes Johanna Gornitzki.
One proposal that caught the eye of the protection industry was the suggestion to introduce a five-year non-contestability clause.
As the paper stated: "We think serious thought should be given to imposing a five-year cut-off period in respect of life insurance. Insurers would still be able to avoid for deliberate or reckless mistakes but not for purely negligent ones. The costs would need to be considered carefully, but we have been told that they are unlikely to be excessive."
However, while this move was met with open arms at first, the positive reactions were quickly replaced by disappointments as the nitty gritty of the consultation paper revealed that this proposal would only include term assurance and not critical illness (CI), income protection or any other protection product for that matter.
With more than 90% of life insurance claims being paid out, a non-contestability clause would not make a great difference. Furthermore, industry experts argued that the proposal, as it currently stands, will have little, if any, effect at all on life insurance claims as some providers say they operate an unofficial cut-off point for the majority of life insurance policies after five years have lapsed. Saying that, a shorter non-contestability period is unlikely to be on the cards after an industry expert revealed that a three-year cut-off clause would increase the price of premiums by up to 30%.
Cost also seems to be the main culprit when it comes to excluding other protection products from the proposal. CI insurance, for example, with a declined claims rate of around 20%, would most definitely have benefited from having a non-contestability clause. But sources revealed that having a non-contestability clause on CI contracts would inflate the cost of premiums as the average policyholder would have to pay for all the policyholders that would take this opportunity to be dishonest and 'fail' to disclose vital information within those five years.
But, while the current proposal only applies to life cover, the majority of CI sales include life cover, causing a heated debate among industry experts whether CI with accelerated life will be included or not. It has even been suggested that those kinds of policies may have to be separated in the future.
All in all, whether or not the Law Commission's proposal will come into effect or not, it looks like it will have a minuscule impact on the industry and, above all, consumer confidence.
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