“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.
