In December, the Law Commission published its report and a draft bill on pre-contract disclosure and misrepresentation. The intention is for the bill to become legislation once agreed by Parliament.
The existing law has been in place since the early 1900s and there is a heavy bias in favour of insurance companies. The legal responsibility currently lies with the consumer to provide insurers with information that may affect their policy terms.
The proposal is to:
- Remove the responsibility of disclosure from the consumer. If an insurance provider wants to know information, they must ask clear and specific questions on its application form. It will no longer be the responsibility of the consumer to know what is relevant to the insurer.
- Keep the remedy of policy avoidance for only the most severe cases of non-disclosure. In all other cases, either full or partial payments will be made. There will be three classifications of mistakes – reasonable, careless and deliberate or reckless.
- Where non-disclosure is classified as reasonable:
– The insurer must pay the claim in full. For careless non-disclosure, a proportionate remedy will be applied based on what the insurer would have done had it known the full facts.
– Deliberate or reckless non-disclosure will lead to the insurer refusing to pay the claim. It means those that have been careless in the application for cover will still receive a payment. Only those that have acted deliberately with the intent to receive lower premiums will be harshly punished.
Since the proposals have been released, there has been much speculation on how it is going to affect the insurance industry. In particular, the focus has been on insurance companies and how they will be forced to pay more claims.
The reality of the situation is, however, very different. The changes are going to have little impact on the protection market when it becomes law.
The Association of British Insurers in conjunction with its members and the Financial Ombudsman Service introduced new guidelines (later to become a code of conduct) on the handling of protection claims and the treatment of non-disclosure back in January 2008.
These guidelines largely mirror what the Law Commission has just produced and insurance companies have been working with them for the last two years.
The guidelines have been very successful, already having a big impact on the percentage of protection claims that are paid across the industry.
In 2008, Aegon paid 91 per cent of all critical-illness insurance claims received, totalling over £18m. Nine per cent of claims declined and, of these, 50 per cent were declined due to non-disclosure and 50 per cent due to not meeting a critical-illness definition.
In 2007, 18 per cent of CI claims received were declined, so our decline rate halved in just one year. The publicity over declined claims has reduced, an indication again that things have improved and consumers are happier with the service they are receiving.
The Financial Ombudsman Service has also reported a drop in the number of complaints it has received in connection with non-disclosure and non-payment of claims.
The reduction in declined claims has come about largely because the remedies for non-disclosure are now less harsh and more people are receiving proportionate payouts. When it does become apparent that non-disclosure has occurred, enquiries are made via the telephone with
A claim assessor needs to determine whether there is a credible explanation as to why the consumer failed to supply the material information that would have affected the original underwriting decision.
They need to consider several factors, including reasons for cover, the sales process, the application form questions, warning messages provided to the consumer, whether the information was within the consumer’s knowledge and if the consumer had acted care- lessly or deliberately.
Once this information has been gathered, a decision can be made on the claim and the future of the policy. Only the most serious cases of non-disclosure receive the remedy of declining a claim, avoiding a policy and refunding premiums. All other cases receive either a full or partial payout, depending on the impact of the non-disclosure on the original underwriting decision and assuming the critical-illness definition has been met.
Insurers have embraced the new ABI guidelines and figures across the industry prove that this is working in favour of the customer.
If the Law Commission proposal becomes legislation, then we, like many other providers are already compliant in terms of pre-contract disclosure and misrepresentation.
What we need as an industry though, is to protect our customers and take steps to encourage full disclosure. The legislation changes, if introduced, do not encourage consumers to disclose information. If a consumer wants to be dishonest, the changes act in their favour.
The impact could be increased claim payments for the wrong reasons and this would lead to a need to increase premiums. Higher premiums will ultimately affect sales in an already difficult financial climate. Work is needed to ensure application form questions are as clear and specific as possible and encourage people to provide the information we require.
We need to ensure intermediaries go through the application form questions in detail, explaining the consequences of providing inaccurate information and giving consumers the opportunity to check their answers. If there is any doubt as to whether information is required, a consumer is advised it is better to disclose and not assume an insurer will approach their GP.
The ABI guidance on non-disclosure and treating customers fairly introduced in January 2008 was only applicable to UK life, critical illness, income protection and other long-term protection insurance contracts. The impact of the Law Commission report on other types of consumer insurance contracts, such as motor and home insurance is likely to be much bigger.
They will need time to review their processes as we have done and introduce changes. It takes time for the changes to bed in. Two years down the line and the protection market is still finetuning.