A closer look at the background to non-disclosures
The “Momentum debacle”, as it became known in the media, has certainly drawn a lot of public and media comment and interest.
Many a commentator used it as a convenient whip to lash the insurance industry. The more balanced reports pointed out that the decision to refute the claim may have been technically correct, but possibly ignored the moral issues at play.
Patrick Cairns states in Moneyweb: “It (The FSCA) makes it clear that it is no longer satisfactory for financial services companies to show that they are following the law. They have to show that they are acting with fairness and in the best interests of their customers.”
The Ethics Institute’s Deon Rossouw writes in Business Day: “Legal compliance is important, but it also needs to pass ethical muster. If legality does not coincide with morality, even legal decisions might still be regarded as morally wrong.”
The facts and figures
Shortly before this issue became a major social media item, the Association for Savings and Investment South Africa (ASISA) published an article with the self-explanatory title “Honesty upfront ensures hassle-free insurance claims”.
“While South African life insurers paid 99.3% of all claims against fully underwritten life policies last year, half of the claims that were declined were due to non-disclosure. In terms of numbers, this meant that while 34 100 death claims were paid, 120 families did not receive death cover worth close to R160 million, because the policyholder did not disclose material information about a medical or lifestyle condition in an attempt to secure cover, or avoid loaded premiums.”
The Long-term Ombud’s 2017 annual report states:
“As has been our experience in previous years, the Claims Declined category had the highest number of complaints with the Poor Service category the second largest. This is the same pattern as in previous years. We are noticing a trend that the Non-disclosure category is slowly increasing over time – from 3% in 2011 to 5.74% in 2017. This could be due to various factors, such as:
|●||more direct business sold;|
|●||more automated underwriting;|
|●||the effect of churning;|
|●||pressure on insurers to out-list new policies very quickly; and, possibly,|
|●||an increase in the dishonest completion of application forms.|
Although there were only 200 Non-disclosure cases closed in 2017 these cases take a considerable amount of time because there are invariably disputes of fact involved. The percentage of cases resolved wholly or partially in favour of complainants came to only 21% which is, however, higher than the 14% in 2016.
Cover versus cause of death
This was of course the main thrust from those aggrieved at the claim being rejected, and understandably so. While the statistics indicate that such an occurrence is very rare in the bigger scheme of things, for those affected it is a 100% loss, and should be viewed in this light.
Is there a quick fix?
No doubt, insurers will have to seriously review their underwriting practices. In the Nathan Ganas case, a HIV test was conducted, and one may well ask why not a few others as well, seeing that the blood sample was available.
The fact of the matter is that the policy was issued in 2014, and the claim arose in 2017.
Steven Weiss, one of our regular contributing subscribers reminded me of a chat we had four years ago about a concept called “incontestability” which is perhaps best manifested in the so-called suicide clause which applies for two years from inception or after a change in the policy conditions.
Investopedia defines this term as follows:
“An incontestability clause is a clause in most life insurance policies that prevents the provider from voiding coverage due to a misstatement by the insured after a specific amount of time has passed. A typical incontestability clause specifies that a contract will not be voidable after two or three years due to a misstatement.”
While a legal requirement in the USA, it does not really feature in local contracts.
An issue that is of concern is the near doubling of claims refuted due to non-disclosure over the last six years, as noted by the Long-term Ombud. A number of commentators expressed concern that the Ganas case may exacerbate this trend.
The answer lies in our hands – if underwriting at application stage is up to standard, we can prevent such unhappy incidents. The fact of the matter is that each of the six TCF outcomes applies to thorough upfront underwriting.
It may very well be necessary to review the reasons given by the Ombud above to see which apply to us, and decide on a plan of action to address relevant challenges.
As Gordon Lightfoot so aptly put it in his song “Sit down young stranger”:
“To wear the crown of peace you must wear the crown of thorns.”