Putting the brakes on non-disclosure

Today’s underwriting philosophy chooses not to follow up on most consumer disclosures at application stage, assuming the individual has provided an accurate and honest summary of their condition. In the past, medical evidence would have been obtained to substantiate the disclosure, so this new position has clearly left insurers more exposed.

At the same time, we are limited at the claims stage in detecting and acting on non-disclosure because of industry constraints. But while we debate the issues and look for potential solutions, perhaps the answers are closer to home.

The car insurance market takes a different approach, compared with the protection industry’s practices, despite many insurers (and reinsurers) operating in both life and non-life markets, and sharing the same trade body and ombudsman.

With the UK & Ireland life branch of Munich Re (Munich Re) recently quantifying the cost of deliberate non-disclosure for the life and critical illness market to be the equivalent of 14% of all paid claims, we clearly need something to change. In a previous Cover article ‘Pushing the limits’, Munich Re discussed the merits of various solutions to reduce non-disclosure at underwriting. While some went part way to help remove non-disclosure, they failed to identify ‘deliberate’ non-disclosure.

Munich Re concluded that the UK’s unique position of having centralised medical records provided the best source of information. However, this poses a commercial problem. While further investigation is required, Munich Re’s current cost benefit analysis shows that balancing the cost of implementation with the potential reduction in risk cost (reflecting the reduction in non-disclosure from the portfolio) appears challenging and possibly not workable in practice.

This applies to obtaining medical evidence on all applicants, as well as a targeted approach of requesting medical evidence based on a small number of specific application triggers.

Simple solutions

We should remind ourselves of why we are focusing on solutions at underwriting if they appear expensive and excessively intrusive for customers. The simple answer is due to the constraints of investigating and acting on non-disclosure at claims stage from both the current ABI Code of Practice and the Financial Ombudsman’s (FOS) assessment philosophy.

The industry has taken strides to ensure fair treatment of claimants, yet one consequence has been that deliberate non-disclosure is now harder to prove at the claims stage with greater restrictions on which claims can be investigated to check for non-disclosure. It is easy to dismiss solutions to non-disclosure at claims stage, but it is worth noting that compared with alternative underwriting approaches, they would not only be more effective but they would affect fewer customers, and cost the industry less.

To illustrate this point, let us look at 1,000 new business applications for either life or life and critical illness which, based on normal actuarial assumptions, led to 20 claims. Trying to spot the 40 deliberate non-disclosures in the 1,000 applications (as per Munich Re research) during the underwriting process is a huge practical piece of work, and is a bit like finding a needle in a haystack.

Conversely, looking intensively at the 20 claims to find the three deliberate non-disclosers at claim stage is much more efficient. Insurers may need to request only  the details of significant medical history and potentially only for claims in the first five years. We recognise there would need to be a solution to comply with the industry best practice on speedy claims payment. Potentially, Niche Health’s iGPRs, an online tool that cuts waiting times for GP reports, could play a part in getting medical evidence swiftly.

Based on our cost benefit analysis of obtaining medical evidence at claims stage to remove deliberate non-disclosure, the difference between the reductions in reinsurance rates, compared with the cost to implement would leave an additional margin that insurers could distribute as they see fit.

If customers are aware of such a claims process, they may be less likely to non-disclose at application stage. This may seem a radical approach compared with where we are now, but let us remind ourselves of our objective. Regardless of whether non-disclosure is related to the claim or not, if an individual has deliberately lied at application stage about a disclosure that would have meant they would never have been provided that cover, they should not have their claim paid.

We are not looking to target those that have accidently or inadvertently non-disclosed, just the true declines and postpones. So what is stopping us?

Looking at the ABI Code of Practice, this does not state that claims identified with deliberate unrelated non-disclosure cannot be declined. The Code does impose limitations on requesting medical evidence at claim stage.

It is a perverse situation that the ABI, the FOS and the Consumer Insurance Act are in agreement that the insurer can refuse all claims where a customer makes a deliberate or reckless misrepresentation, yet insurers (and reinsurers) are not given the provisions to identify unrelated non-disclosure at claim. 

In comparison, car insurers take a different stance. They rely on the Consumer Insurance Act at point of application and accept the disclosures they are given. Typically, at claim stage the first step of their process is to validate the contract. They are able to ask again the same questions that were asked at application stage, using industry data to confirm
the answers.

Where deliberate or reckless non-disclosure is identified, they can void the contract. At this stage the claim has not been considered. This separation between contract validation and claim validation allows car insurers to ensure claims are not paid to deliberate non-disclosers, regardless of a link to the actual claim.

If the contract was never valid, there cannot be a claim. The prospect of a dishonest life assurance customer losing their entire claim amount because they chose to lie at application stage would be an effective deterrent for our own industry.

For us, it is ‘pure chance’ whether the claimant’s dishonesty will be discovered depending on whether the non-disclosure was linked or not to the claim event. This limitation is clearly a barrier and does not allow the industry to ensure that honest consumers are not picking up the cost of the dishonest few.

Non-disclosure ‘tools’

Car insurers have also collectively invested in a range of tools to check for potential non-disclosure and fraud. Examples would be the Claims and Underwriting Exchange which allows verification of claims history.

There is also the new initiative called ‘My Licence’, which allows car insurers to check speeding endorsements and other details, such as what sort of car a driver is allowed to drive. Even the data gathered from telematics can be a powerful tool at claims stage.

Car insurers are upfront with their customers about the data that can be used, and the fact that it will be used to validate the contract at claims stage, as well as identifying fraudulent claims. Similarly, our market has access to centralised medical records, which could be used to validate the original application disclosures.

The cost of fraud

It is not just the limitations at claim stage that we should reconsider but also our industry’s general approach to non-disclosure. We appear to be reluctant to publicise the issues of non-disclosure and the unfair cost to the majority. In contrast, the car insurance industry’s message to its customers regarding non-disclosure is assertive and direct. They call those that omit unforgettable, relevant information ‘liars’ and use the term ‘fraudulent’ with ease. They spell out the cost of such fraud to the honest customer plainly.

The ABI is leading these comm­unications, which is in stark contrast to what we see in our own market. The ABI recently stated that life insurers detected £11.8m of attempted claims fraud in 2013.

Interestingly, Munich Re’s own analysis would estimate the cost of deliberate non-disclosure for Munich Re alone to be in excess of £50m in 2013. If the accurate cost is not correctly stated, we are unlikely to get the correct result. Clearly, the ABI represents its members’ views, so maybe the conclusion is that our industry is less concerned with this issue compared with motor insurers? Why, when many insurers (and reinsurers) operate in both life and non-life markets, and have the same trade body, is the approach to non-disclosure treated so differently?

We recognise that the compulsion of car insurance will lead to different approaches, in comparison, our market has been on the ‘back foot’ for too long in addressing the issue of deliberate non-disclosure.

The ABI Code of Practice may have been appropriate when it was issued in 2008, but Munich Re’s non-disclosure analysis suggests that new approaches need to be considered. With levels of trust among existing and potential life assurance customers neutral at best, not exposing and tackling those that deliberately non-disclose will hold us back.

Changes at claim stage, supported by an industry-led campaign to publicise a ‘zero tolerance non-disclosure culture’ could go some way to addressing the current unjust situation. We recognise this is unlikely to be a quick or easy solution, but let’s start the debate.

Adrian Stevenson is business development manager at Munich Re UK & Ireland Life