Munich Re research has found non‑disclosure to be a lot more common than previously thought. As Lee Lovett explains, stopping it is not easy.
The working hypothesis was that we expected to see a number of cases where this additional information would lead to a different underwriting decision. For example, some applicants would have got better terms had this information been available, as it clarified that a particular condition was in fact controlled or irrelevant, while in other cases it would have led to a higher premium or the case being declined.
There was a suspicion of a small bias towards worse terms, as it was thought there could be some fraud or deliberate non-disclosure of relevant factors.
However, our analysis showed that the prevalence of non-disclosure and the degree of deliberate concealment went far beyond expectations. This was not a case of subtle answers to vague questions; there was deliberate intent to mislead by 4% of all applicants.
While this number at first seems quite small, these cases are expected to exhibit a substantially higher than average mortality rate. Indeed, based on the recommendations from our underwriting manual (MIRA), the mortality rate for these cases could be at least four times higher than that of a healthy life.
These applications are also expected to show much lighter lapse experience. This is on the simple assumption that, having successfully lied their way through an underwriting process and gained a policy, the applicant is unlikely to risk losing that cover by seeking a replacement policy elsewhere, even if the price is a little cheaper.
Putting all this together for a typical portfolio of business, one in seven paid claims arise from fraudulent applications.
In looking at the individual applications in more detail, it was questioned whether these cases would be identified at the claims stage. We found that without direct access to the full medical history, this would not be possible in the majority of these cases of clear deception. The ability to uncover the lie is therefore increasingly difficult, and as a result we can only see this problem growing.
Treating customers fairly
Generally, under Treating Customers Fairly (TCF), individuals who have innocently misrepresented their situation at the point of underwriting are quite rightly viewed sympathetically at the point of claim, if the issue misrepresented was not a direct cause of the claim.
However, a consequence of TCF has been that deliberate non-disclosure is now harder to prove at the claims stage and, as a result, fewer claims have been rejected in recent years.
The honest majority of policyholders are therefore being treated unfairly, as they pick up the cost of non‑disclosure from the minority through higher premium rates.
Is this treating honest customers fairly? The industry is allowing the vast majority of customers to pay higher premiums to cover the costs of this minority group.
In another sector of the insurance market, car owners have to pay more for insurance due to the number of uninsured drivers – is this the life insurance equivalent?
If deliberate non-disclosure increases over time, then premiums will need to increase to cover the additional cost – what would this do to the protection market? It’s certainly not a sustainable scenario, so something has to change.
The Association of British Insurers (ABI) and the Financial Ombudsman Service (FOS) have moved the industry to a position where it is harder to investigate claims for non-disclosure. This position has been reinforced by the Consumer Insurance Act, which came into force last year. Where non-disclosure is found, it is harder to decline the claim.
While this position has the best intentions to pay more claims and improve customer confidence, our analysis demonstrates it is flawed. The indirect consequence is more claims are being paid to those who non-disclose, thus increasing premiums for honest customers.
Seeking a solution
Munich Re fully supports any initiative to improve payout rates and increase consumer confidence, but is there another way to achieve this? Contradictory to the ABI and the FOS intentions, the most obvious way of dealing with this issue is to take a harsher approach at claims stage. Could we have the right to investigate any claim and, after reviewing relevant medical evidence, decline it if material non-disclosure is found?
Would a clear marketing message to applicants at the time of purchase declaring that they need to be honest about their disclosures do the trick (although application forms do already contain a clear message on the need for full disclosure)?
In simple terms, catching one fraudulent claim from every seven is likely to be an easier and less costly task than trying to identify the four fraudulent applications from every 100 received.
However, such a dramatic change at claims stage would understandably be met with resistance from many quarters, with the industry having spent many years moving to the current philosophy. So is it feasible to address this problem at point of sale?
Despite the industry’s best efforts, analysis and experience tells us we cannot rely solely on application forms to eliminate non-disclosure, especially where it is deliberate.
To identify deliberate non-disclosure at point of sale we would need to obtain medical evidence as part of underwriting. Insurers are already considering obtaining full medical records, and using this approach would effectively eliminate non-disclosure.
If this were the case, there is then the potential to introduce some form of claims guarantee – something that is bound to appeal to customers.
Clearly there are some material financial and logistical considerations to be considered in implementing this process, and some form of automation would be required to make it viable. However, continuing to ignore the costs of the current fraudulent behaviour is not acceptable if the life assurance industry wants to be fit for purpose in the future.
We need to demonstrate that we trust the vast majority of customers are telling us the truth to the best of their knowledge at the time of application, and not challenge them at claim stage. We should be focusing our efforts on identifying the deliberate fraudsters, and we can only achieve this through a fundamental shift in philosophy.
Lee Lovett is head of business development at Munich Re UK Life
