Addressing the issue of non-disclosure

The two main reasons for life insurers to decline a death claim on an individual life policy are suicide, committed within two years of a policy’s inception, and the material non-disclosure of facts during the application stage. A major issue the life industry is currently dealing with is determining what the best practices with regard to non-disclosure are, in order to ensure a fair outcome for the insured and the insurer, should a case of material non-disclosure arise.

For life insurance purposes, material non-disclosure is defined as the failure of policyholders to disclose important information about a medical or lifestyle condition. This non-disclosure can take various forms, namely intentional, unintentional or incidental non-disclosure. Intentional non-disclosure, or anti-selection, accounts for the highest number of fraud cases experienced in the life insurance industry and automatically results in a policy being voided. However, the major issue within the industry entails the handling of unintentional or incidental non-disclosure and the different courses of action available to insurers.

According to most insurance policy contracts in South Africa, should non-disclosure be discovered, the insurer has the right to decline the claim and void the policy from inception. However, an increased focus on consumer concerns suggests a proportionality approach to non-disclosure may be a more appropriate solution to consider in future. Possible solutions include insurers accepting the risk in full by loading the premium retrospectively, applying an exclusion clause or a waiting period once all information becomes available, or alternatively reducing benefits at the claim stage. The issue of claim payouts can best be illustrated where insurers pay proportionately lower benefits based on the ratio of the actual premiums paid versus the premiums that should have been paid had the applicant disclosed the material fact from the start. Although this might be perceived as unfavourable for the insured best practice in this regard dictates that while some form of cover should be available to people who may not have intentionally committed material non-disclosure, payment of the full benefit would introduce moral hazard for the insurer.

The Life Ombudsman’s office has encouraged the life insurance industry to adopt the proportionality approach to non-disclosure, as a voluntary industry norm, in an attempt to reduce the number of rejected policy pay-outs. RGA Reinsurance Company of South Africa has also been interacting with the major life insurers in an attempt to better define how the issues surrounding non-disclosure can and should be dealt with, and what the best responses are in different situations.

Accordingly, the life insurance industry has been working hard to align its business procedures with these proposed industry approaches. Insurers are improving the ways in which they gather information from applicants and are also clearly defining their approach to non-disclosure pay-outs, whether by a proportional amount or by imposed penalties, or a combination of both. Similarly, warnings on application forms, advising applicants that they cannot assume the insurer will obtain information from their doctors, and that it remains the applicant’s responsibility to complete the application form truthfully, are becoming more commonplace. Life insurers have also refined their application processes, as more specific questions continue to be incorporated into policies, with less focus on open-ended questions.

With key industry players combining to define, apply and communicate clear non-disclosure practices, the situation can only improve. This, combined with the use of proportionate remedies to reduce the problems associated with non-disclosure, will help to build consumer confidence in the life insurance industry.