Posted on: April 5, 2023

How Do Insurers Approach Claims?

11-07-2023 Correct at time of publication, but subject to change.

You might well expect insurers who receive claims for death, terminal illness, critical illness and income protection to have a negative approach to claims as it is in their interest financially. In my experience exactly the opposite is the case. Insurers openly co-operate with claims and pay out where ever possible even if sometimes they are within their rights to refuse. Surprised, well read on.

Some examples of good insurer practice

Since our inception in 1989 Village Financial Services has seen numerous claims for various events. It is fair to say in the early days that on occasion clients had to fight for a claim to be paid in the event of a grey area. But things have changed. Insurers have changed. And here are two recent examples from the last year…

Client X became terminally ill with cancer. He had a life assurance policy that also had a terminal illness clause in it. Essentially in the wording of the policy if the client had less than 12 months life expectancy then the sum assured would be payable, but this clause was excluded in the last 18 months of the policy. As the client was in the last 18 months of the policy, the insurer had every right to refuse the claim until client X passed away. But here is the thing…. They didn’t refuse the claim, instead they paid it, even though they were at liberty to do so the claim was paid while the client was alive under the terminal illness clause. The sum assured was substantial at over half a million pounds. The insurer stated that as they knew they had a claim coming before the end of the policy term that they would not impose the 18 month exclusion clause. What the insurer was saying was we won’t wait for client X to pass away before paying the claim, it does not benefit client X’s family and we are committed to a claim in the future anyway. Client X received full payment while he was alive, allowing them to ensure his family was financially provided for before his condition deteriorates.

Client Z had a later life diagnosis of a Neuro diverse condition. This affected his ability to carry out certain parts of his job and as such he had to reduce his hours and take a pay cut. Client Z had income protection insurance. The insurer pointed out that they could only pay for a full loss of income. But they countered that they could consider a partial claim on an ex gratia basis. So the claim was made, considered, and the insurer agreed a monthly payment to replace part of the lost income until his normal retirement date. Again the insurer would have been within their rights to refuse the claim, but because their “culture” was right they agreed to pay out. Client Z now receives part of his income from the plan until his normal retirement date.

Financial Conduct Authority directives & firms “culture”

The Financial Conduct Authority never stand still, they are always looking for improvements and protection of the consumer, even if they don’t always get it right. There are three directives that push insurers to look at their “culture” and how they deal with customers. These are:

  • Treating Customers Fairly (TCF) – This directive was introduced in 2006. It deals with the culture within a financial services firm and how it focuses on customer outcomes and avoids conflicts.
  • Vulnerable Customers – This directive was updated in 2021 to cover a wider cohort of customers. Essentially is directs firms to ensure they provide extra assistance and resource for those in vulnerable circumstances. It is broadly divided up in to 4 areas of concern, Health, Life Events, Resilience, and Capability. Furthermore it hold the firm responsible where they are seen to breach the guidance.
  • Consumer Duty – Consumer Duty comes into force in July 2023. Firms should already have a framework in place to roll out on the due date. It is essentially a ramping up of the existing rules and has been described by advisers and firms as “TCF and Vulnerable Customers policy on steroids”

One thing is true of all of these directives is that it looks at a firms “culture” and if firms are putting themselves first at the expense of their client then they can expect sanction from the FCA.

What percentage of claims are paid?

According to Legal and General’s publication on 2022 claims statistics they paid:

  • 96.7% of all life assurance claims
  • 94.3% of all terminal illness claims
  • 93.4% of all critical illness claims
  • 99.6% of all children’s critical illness claims
  • 82.2% of all income protection claims

The reasons these are not all paid out 100% of the time is because insurers can decline a claim for two main reasons.

Non-disclosure – Where an insurer will either refuse or reduce a claim if there is wilful non-disclosure. This is where a client fails to disclose medical details that would materially affect an insurer decision. So it is important that if you are answering medical questions as part of an application that you answer them accurately.

Does not meet definition – This is where the claim does not meet the definition as laid down by the insurer. For example you don’t meet the definition of less than 12 months life expectancy, or you don’t meet the definition for a specific critical illness payment to be made.

In summary

It is fair to say insurer’s culture has changed. Whilst you might not get a claim agreed where you don’t meet the insurer’s criteria, they are still considering ways to pay the claim. Insurers now look at all claims on the basis of “how can we pay this”. And where there is non-disclosure insurers will look to adjust or reduce a claim wherever they can rather than refusing a claim outright. Most insurers publish data each year on what percentages of claims are accepted so that advisers and consumers can see the data and make an informed decision.

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