Mixed reaction to growing trend of proportionate CI payouts

■ But non-disclosure ‘stopgap’ sees more payouts reduced

MADELEINE DAVIES

Critical illness (CI) claims declined for non-disclosure fell in 2008, but within the high percentage of claims paid out exists a number of proportionate payments to policyholders who have committed “negligent” non-disclosure, a Health Insurance investigation has found.

While the percentage of claims paid proportionately remains low, it represents a concerted effort on the part of providers to rehabilitate the reputation of a product blighted by stories of claims declined, including the now notorious “Widow’s Story”.

Although many insurers have practised this approach for some time, it was standardised in January 2008 when the Association of British Insurers (ABI) issued guidance entitled Non-disclosure and treating customers fairly for long-term protection insurance products.

The guidance created categories for non-disclosure, and indicates that in the case of negligence “the insurer will seek to put the customer back to the same position as an identical customer who had accurately disclosed the omitted information and who paid the same premium for the same type of policy”. The outcome is determined by what the underwriting decision would have been if the omitted information had been accurately disclosed at the time.

For example, if disclosure would have resulted in a higher premium the insurer will calculate what cover the premium actually paid buys the customer and will pay out this sum. If an exclusion would have been applied and the exclusion applies to the claim, or if the application would have been declined, no payment will be made.

“It’s very much part of a three-pronged approach to getting back confidence in the CI market,” said Mark Jones, head of protection at Friends Provident. “The first part is the whole process – looking at the way you ask questions, the application form etc. Then there is the education element, giving clients a better understanding of why we ask these questions. And lastly there is the culture of fairness, and proportionate payments are very much part of that.”

“What we are all trying to do is clear up the profile of CI which has been bashed in the past,” said Phil Jeynes, key account manager at Direct Life & Pension Services Ltd, the adviser. “The impression that has been given is that the insurer is just trying to wheedle out of paying.”

Peter Barrett, head of claims at reinsurer RGA, welcomed the move but sounded a note of caution about comparing proportionate payments across providers.

“Like a lot of league tables, what in principle seems like a good idea at the time, can be difficult for a customer to understand,” he warned, pointing out that claims are affected by the length of time a provider has offered the product in question.

Barrett said the Health Claims Forum plans to issue guidelines to insurers on how they should report on claims paid and claims declined.

THE IMPORTANCE OF TRANSPARENCY

Jones claimed the reaction from claimants in receipt of a proportionate payment has been “excellent”.

“They’ve understood the issue caused by not providing in full information and they’ve understood or really appreciated the approach adopted by an insurance company,” he said. “They are really pleased it has been dealt with in such a sensitive way. They will be advocates of the insurance industry and advocates of taking a bit of care.”

But Jeynes said: “My instinct is, for that person it would still be a case of ‘the glass is half empty’.”

John Chapman, managing director of Torquil Clark, the financial advisers, described the approach as a “really positive move”.

“The key is explanation and the clarity about what is happening,” he said.

“They need clear guidelines on what proportion is paid in what circumstances.”

Insurers agree that it is important that both clients and advisers understand why a claim is paid proportionately.

“We allow claimants direct contact with their claims assessor,” said Chris McFarlane, head of protection at LV=, the insurer. “If we do find there is non-disclosure we will make contact with the customer, using the phone as well as letters. We will ring and explain what’s happened, and each case is dealt with individually.”

Jones is keen to emphasise that the payment calculation is in no way subject to discretion but made by measuring the impact of the non-disclosure.

“Given that there has been so much good work done by the ABI and a lot of clarity added through the guidance given, certainly all ABI members will be following that guidance and you should get a broad consistency across providers,” said Phil Brown, head of underwriting at Zurich.

A TEMPORARY SOLUTION?

While Brown acknowledges that the percentage of proportionate payments could rise, insurers agree that prevention of non-disclosure is better than any palliation of its effects – and teleinterviewing has a key role to play.

“We want to pay 100% of valid claims,” said McFarlane, who is a firm advocate of teleinterviewing and has produced a guide that advisers can share with customers.

“Ninety-five per cent of customers have rated their experience of it as good, very good or excellent,” he went on. “It’s about advisers getting confidence in it.”

“With teleunderwriting you give the customer so many warnings about the fact that they have to answer fully,” said Jeynes. “We use the questions from the insurer rather than paraphrasing them. It removes the risk for the adviser.”

Friends Provident’s Jones added: “I would be really, really chuffed if proportionate payments became completely unnecessary in future.”