One option that is regularly mooted is a compulsory non-contestability period. This would ensure that once a policy had been in force for a set time period, an insurer would not be able to decline a claim for non-disclosure. This would reduce declined claims stories in the press and give consumers, and advisers, greater confidence to take out cover.
This approach was first put forward by the Law Commission in 2007, when it proposed a five-year non-contestability period for life insurance policies. Hence, once a policy was at least five years old, insurers would be able to avoid claims where the policyholder had made deliberate or reckless mistakes, but would have to pay all other claims.
Johnny Timpson, financial protection specialist at Scottish Widows, backs the commission’s recommendation. “It was a really good idea, especially given the maturity of the life insurance market,” he says.
“Insurers were beginning to embrace more predictive underwriting, giving them better insight into customer risk, so it would have been an ideal time to embrace a non-contestability period.”
Although the proposal was never adopted, it received a good level of support. Of the 61 responses from life companies and reinsurers, 34 were in favour of a five-year period, with a further three pushing for it to be shortened to two years as is the case in some other countries, including the US.
For and against
Given this response, the idea was revisited in a Protection Review poll earlier this year. Again, it found that the market was fairly evenly split between those wanting this feature to be introduced and those against it.
The most popular single answer, with 43 per cent of the vote, was that it is not necessary to introduce a compulsory non-contestability period. But this left 57 per cent in favour, with 32 per cent opting for a five-year period.
Ten years was the second most popular time period, supported by 15 per cent, followed by a two-year period chosen by 10 per cent.
Kevin Carr, chief executive of Protection Review, is not surprised by this result. “There is an interesting trade-off when it comes to non-contestability,” he says.
“If people knew insurers could not decline claims after a certain period, it could boost consumer and adviser confidence. However, this would come at a price, as it could result in an increase in upfront underwriting and push up the cost of cover.”
Increasing consumer confidence is a key objective for the protection industry. It has published claims statistics for the past 10 years to highlight the fact that the vast majority are paid. In addition, insurers have overhauled their application processes to further reduce the number of claims that are declined. But Mr Timpson believes this is not enough. “Over the past decade the industry has been publishing these statistics and protection has also got cheaper, but sales have flatlined,” he says.
“The key reason for this is that, although we can demonstrate we have improved, this has not changed consumers’ perception of us. A non-contestability period could address this.”
A cheats’ charter
Introducing a non-contestability period to gain this trust could have several downsides. Alan Lakey, director of CIExpert, believes there is a risk that it would create a “cheats’ charter”. “Those that lie or downplay the medical aspects will see it as something they could get away with,” he explains.
“Without an option to decline claims, insurers would need to increase the amount of underwriting to ensure this does not adversely affect their book of business.”
Research presented to the Institute and Faculty of Actuaries in 2014 (‘Claims guarantees, fact or fiction?’, by Lee Lovett and Andy Doran) found that typically less than five per cent of applicants materially non-disclose. Across these cases, more than half come down to four areas: depression and psychiatric disorders (17 per cent), smoking (16 per cent), cardiovascular disorders (15 per cent), and alcohol (11 per cent ).
The research also points to potentially longer settlement times for claims. Where a claim does happen in the first five years, the ability to decline it could mean insurers will launch more investigations, pushing up settlement times across the board.
As an indication of what might happen, the research found the average length of time to decline a claim was 123 days, almost three times longer than the 45 days it takes to pay a claim.
This data is supported by the experience of the life insurance industry in the US, where a two-year, non-contestability period on life products has resulted in greater underwriting at outset, and more claims investigated and declined within those initial two years.
Introducing a non-contestability period increases the likelihood that the cost of cover will rise. This would be down to a combination of increased underwriting, more investigations and having to pay some claims that would previously have been declined.
Mr Lakey likens it to the case of Woolworths, which used to say that two per cent of its price was to cover shoplifting. “I am not too worried about the cost rising, as price is rarely a determining factor when people take out cover, but it is unfair that the honest policyholders would have to cross-subsidise the less honest ones,” he says.
Digging deeper
To prevent non-disclosure increasing, it would be necessary to seek more evidence to substantiate applicants’ medical declarations. This could lead to more GP reports, something that can prove tricky for protection insurers.
While this could be challenging, Andrew Wibberley, director at Alea Risk, says the dynamic could change in today’s data-rich environment. “If someone could provide their medical records electronically, then an insurer would be happy to guarantee the claim,” he explains.
Big data could also change the underwriting process, enabling insurers to take a much more predictive approach. As an example, Mr Wibberley points to an individual who says they went to a particular university. If this is cross-referenced with their Facebook page and they have no friends from that university, it could be an indication that they might not be entirely honest. This insight might then trigger further investigation.
It is also worth examining how exposed insurers would be to claims they would previously have declined.
The Institute and Faculty of Actuaries study shows the percentage of claims that are declined after five years drops off significantly. For example, in the first year 21 per cent are refused. In the second year this figure falls to 12 per cent, with the trend continuing until it reaches one per cent after five years.
These figures suggest a five-year non-contestability threshold would give insurers the ability to catch a significant proportion of claims where material information has not been disclosed.
Stick or twist?
Non-contestability periods are common in other markets around the world, with most opting for either a two or five-year period. But, while they have successfully built their protection business around these terms and conditions, introducing a non-contestability period into an established market is more difficult.
The dynamics at play mean there is no appetite for a single insurer to adopt this approach. “There is too much risk for an insurer to do this,” Mr Wibberley says.
“There is too high a risk of selection against them and, if the price was higher they would fall to the bottom of the aggregators’ tables. It would need to be introduced across the protection market to work.”
With the idea of a non-contestability period supported by a significant part of the market, the pros and cons of introducing this concept must be carefully weighed up.
BIG NUMBERS
97.3%
Percentage of protection claims paid in 2016 (Association of British Insurers)
36,814
Number of life insurance claims paid in 2016 (Association of British Insurers)
52%
Of consumers believe life insurers pay out less than 70 per cent of claims (Aegon)
7.1%
Increase in sales of life insurance in 2016 (Swiss Re, Term and Health Watch 2017)
83%
Of policyholders are unaware insurers publish claims statistics (Aegon)
