The rejection of insurance claims, particularly as a result of non-disclosure by a policyholder, is a thorny issue for the industry.
A recent Law Commission report proposed introducing a non-contestability period which would force insurers to pay out on all non-fraudulent claims after the first three years of a policy.
The industry believes this would help to build its ailing reputation although some providers are concerned that the negative impacts, such as stricter underwriting, would outweigh any good done.
Scottish Widows director of protection marketing Nick Kirwan says a non-contestability clause would help restore trust as consumers would be confident their policy would pay out.
He says: “This is the right thing to do. The biggest single issue in the industry is consumer trust. Non-contestability could boost trust and encourage consumers to take out insurance policies. Non-disclosure accounts for two-thirds of all rejected claims and affects the whole suite of protection products. Non-contestability is certainly one answer and, on balance, it will be very positive.”
Bright Grey product director Roger Edwards agrees that a non-contestability clause could help the industry’s reputation if it reduces non-disclosure but fears it could create a myriad of new issues to face.
According to Edwards, people who have lied on their application forms will effectively get away with it. He says: “I do not think a non-contestability clause will increase the number of people being fraudulent but it would mean that those people are more likely to get away with it and is that fair on the people who have disclosed?”
RGA head of business development Jason Hurley believes that if insurers cannot decline claims, they will be fussier in choosing who they put on their books and more limited in the illnesses they cover.
Aegon Scottish Equitable head of underwriting Matt Rann predicts that insurers would clamp down on the underwriting process and raise premiums. He expects that more people would have to obtain a general practitioner’s report before being accepted whereas currently only customers taking out policies worth more than 300,000 are required to obtain a GPR.
Rann suggests that non-contestability clauses could mean that GPRs are automatically required for any policies over 100,000, dramatically slowing down a process which is already criticised for being slow.
While more consumers might initially be encouraged to buy insurance, Rann suggests that slower underwriting would eventually deter people from taking out policies and potentially increase the protection gap. He also says intermediaries would have to wait longer to receive commission, affecting their cashflow.
Another issue worrying providers is that people with health problems would take a gamble on surviving the first few years of a policy and claim as soon as the non-contestability period kicks in.
Rann says: “Non-contestability could lead to customers betting against the insurance company. The industry might need to review critical-illness cover full stop and the price of premiums would have to go up to offset that.”
But Kirwan claims a non-contestability clause would stop the churning of protection products. He says: “If you are an adviser and you rebroke a policy, it gets the clock ticking for the customer again. Policies will remain in force longer, improving the profitability of contracts and offsetting claims.”
The Law Commission report suggests introducing a three-year non-contestability period but the industry is debating whether a longer period, possibly five years, might work better.
Kirwan says insurers and reinsurers may not clamp down on underwriting so severely if the non-contestability period is longer.
Rann says: “The period is what the industry needs to get its head round. We need a balance between what the customer wants and the impact on the industry. Five years might be acceptable as many companies do not really look for non-disclosure after five years, so the impacts might not be as dramatic.”
Hurley says that investigations after five years generally only occur if there is a clear case of fraud.
Providers are also concerned that the non-contestability clause might be applied retrospectively, as they would have to pay out on past claims rejected due to non-disclosure.
Kirwan believes that even if retrospection does not occur, there will be a lot of pressure for providers to rebroke policies because customers would prefer a product which offers a non-contestability clause.
He says: “Indirectly, it will trigger rebroking. Companies will be under pressure to apply this retrospectively to keep people on the books.”
Edwards says the industry should concentrate on making application forms clearer and easier to understand as a means of preventing non-disclosure rather than introduce a non-contestability clause. He adds that a set of rules regulating how unrelated non-disclosures are treated would reduce the amount of claims rejected.
Highclere Financial Services partner Alan Lakey says: “The only workable solution is if a company at the outset makes a commercial decision to obtain full medical disclosure or decides that the number of cases it might decline are sufficiently low that it is better to save the money spent investigating fraudulent cases and just pay out.”
Kirwan believes that adopting a non-contestability clause will ensure a more level playing field in the protection industry.
With the Law Commission’s help, the industry may be moving towards a more uniform system which many believe can only be positive.