Need for disclosure from insurers on claims pay-outs

Sometimes you have to acknowledge the good things happening in the financial services industry. Push the payment protection insurance mis-selling scandal to one side and look at some of the positive steps being taken by companies to improve the customer proposition.

Protection insurance – no, not cheap, nasty PPI – is a case in point. During the past three years, providers of critical illness (especially) and income protection insurance policies (getting there) have done much to install renewed confidence in the protection products they sell, primarily through independent financial advisers.

Cajoled by the press and belatedly the Association of British Insurers, protection insurance is now the essential product it should always have been. It does what it says on the tin: provide financial protection at a time of great need.

I was reminded of the distance travelled by many protection insurance providers the other day when the mighty Aviva released its critical illness claims statistics for 2011. Last year Aviva paid out nearly £114m in claims, an average of nearly £74,000 per claimant. Of the total claims made, 94.1 per cent were paid. In other words, 5.9 per cent were declined. Of those declined, only one per cent were rejected because of non-disclosure.

To put these figures into perspective, I asked Alan Lakey of Highclere Financial Services, one of the country’s leading protection insurance specialists, to analyse them. Mr Lakey has amassed the most comprehensive database ever assembled on critical illness cover. He has put it all on the web (ciexpert.co.uk) and it is an invaluable tool for both the consumer and financial adviser.

“My site is designed to achieve two outcomes,” he told me the other day. “First it is there to provide clarity and confidence to consumers. Second, it has been set up to educate advisers and provide them with previously unavailable information.” It is a treasure trove of information that advisers operating in the protection insurance ignore at their peril.

According to Mr Lakey, Aviva met 73.6 per cent of critical illness claims in 2004. In other words, it rejected more than one in four claims. Last year its rejection rate was one in 20. Quite a turnaround.

So what has happened? Well, the ABI has to take most of the credit although it took a lot of campaigning by consumer journalists (myself among them) to get it to take action. It was the ABI’s decision to tackle the thorny issue of medical non-disclosure that changed the face of critical insurance, turning it from a con trick of a policy to something extremely worthwhile.

Three years ago the ABI stopped insurers from blanket rejection of claims on the grounds customers had not fully disclosed their medical history at the time they bought a policy. Claims, infuriatingly and wrongly, were rejected even if the non-disclosure discovered by the insurer was not relevant to the claim made.