Non-disclosure - A dangerous gamble

01 November 2010 Dr John Schoonbee, RGA Reinsurance Company

Non disclosing is a crapshoot - literally gambling with the benefit payout for the life insured in terms of living benefits, and with the future financial security of beneficiaries in the case of life insurance.

Non disclosure isn’t just bad news for insurers. It can be catastrophic for a life insured and his/her beneficiaries if a claim is declined. It is imperative that applicants are educated and assisted by their financial advisors to fully disclose both medical and non medical risks.

Understanding the context

When pricing life products, actuaries make assumptions regarding the group of individuals that will be insured. In underwritten products, one of the assumptions includes that the applicants as a whole will generally be healthy. If they are found not to be healthy at underwriting stage, they could be declined and hence are correctly excluded from the group that was priced in terms of the actuarial assumptions. Alternatively, they could be included, but at a proportional premium loading that covers the increased risk or incidence of the ill health leading to a claim.

In non mortality benefits like disability or critical illness, the ill health issue can be overcome by excluding the condition, or a combination of conditions, or systems. Again the incidence of the remaining claimable events will tend towards those of the typically healthy population – assuming there is no consequent increased risk of claiming under other ‘non excluded’ areas, conditions or systems. The solution might even be a combination of both an exclusion and a loading.

In a perfect world this solves the pricing issues, and limits the cost of insurance for the majority of the healthy population in that they don’t cross subsidize the unhealthy. But then one comes to the prickly issue of non-disclosure.

Pertinent issues

Some of the considerations that will determine whether or not a non disclosure claim gets paid include the nature of the information not disclosed at underwriting stage, how that non disclosure is related to the cause of death or disability in terms of being causal or non causal, what might have been the decision at underwriting stage had that disclosure been made, and the philosophy of the particular company regarding non-disclosure.

The ombud’s rulings regarding non disclosure are by no means always clear cut - the test employed as to what information is essential in determining whether to accept a risk is within itself subject to interpretation.

Options open to insurers

Companies have reputations to protect, and that is certainly high on companies’ agendas when paying claims. But it would be the foolhardy to rely on this in the hope that one would get paid following blatant non disclosure.

In addition to declining the claim, companies have various options when faced with non disclosure. These include re-constructing the case from an underwriting point of view and adjusting the sum assured if a loading would have taken place, or retrospectively placing the necessary exclusions. Even in non causal claims, a company might use these remedies if major non disclosure is discovered.

Making the right choice

Consumers have many options to be insured, even if suffering from ill health. It would be far wiser to investigate these and have limited insurance, knowing what one would or would not be covered for, than trying to sweep increased risks under the carpet in the hope that it won’t be found out.

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