Financial Services Sector Must Move Beyond Compliance

Insurers must find a way to avoid the issues raised by the Ganas case. Those who address this challenge first, and do so successfully, could gain a significant competitive advantage in the market.

When Momentum life insurance declined to pay out Nathan Ganas’s policy, it wasn’t an act of malice. Nor was it driven by greed. The company was simply adhering to the law.

This wasn’t the first time a life insurer had refused a claim on the grounds of non-disclosure that was unrelated to the cause of death. Several industry experts acknowledge that their underwriting processes might have led them to the same conclusion as Momentum.

Legally, Momentum’s argument is sound. Ganas had a condition that should have disqualified him from receiving life cover in the first place. Therefore, the claim should not have been paid out.

The underlying reason is to protect the rest of Momentum’s policyholders. They all belong to the same risk pool, which requires careful management. If large numbers of people are paying premiums that do not match their risk levels, the sustainability of the entire pool could be at risk.

The Regulator’s Stance
Why then, was there such an outcry? And why did the Financial Sector Conduct Authority (FSCA, formerly the FSB) state that Momentum’s decision to reverse course and pay out the Ganas claim “reflects the spirit of discussions between the FSCA and Momentum”?

This statement from the regulator is significant. It signals that it is no longer enough for financial services companies like Momentum life insurance to merely follow the law. They must also demonstrate that they are acting fairly and in the best interests of their customers.

Consider the situation where a life insurer accepts premiums from a client for decades, only to reject the claim at the time of death based on a non-disclosure. There’s a clear asymmetry here that needs addressing.

It’s fair to ask what the company was doing during all those years to ensure it was accepting those premiums in good faith. Shouldn’t the insurer take responsibility for ensuring that it will deliver value for money?

Remember, in the event of a death-benefit claim, the client has no way of testing the efficacy of the policy before they need it. It’s not like a microwave oven that you can return if it doesn’t work. You only find out if you’re going to get what you’ve been paying for when it’s too late to do anything about it.

The Client’s Responsibility

There is a reciprocal relationship at play. The insurer can argue that the client needs to act in good faith too. If you take out a policy, it’s your responsibility to be honest when disclosing your medical history.

However, consider the variables involved. Firstly, clients rely on their memory. Can Momentum life insurance genuinely expect policyholders to remember every diagnosis, particularly if they don’t receive ongoing treatment?

Additionally, clients might not know what is significant and what isn’t. It’s one thing to say disclose absolutely everything, but there’s only so much space on the form.

Terminology can also cause confusion. For example, do you suffer from paraesthesia? If you experience pins and needles, then technically, you do—but would you necessarily know that?

What about the role of the broker who helped you take out the policy? There’s anecdotal evidence of brokers omitting parts of a client’s medical history when filling out forms to ensure policies aren’t rejected.

While the standards of financial advice are improving, there are still brokers whose primary interest is securing the policy and earning the commission. It’s wasted time for them if the insurer rejects the application.

It’s even possible that a doctor made a diagnosis that you were never informed about. You can’t disclose what you don’t know, but the insurer could reject your claim because of it.

Solving the Problem

Given everything that can go wrong, can insurers like Momentum life insurance still, in good conscience, place all the responsibility on the client? This is a question that the industry must now address with far greater introspection.

In the short term, this may require some kind of trade-off. Insurers need to protect their risk, which may mean requiring more thorough medical tests upfront for everyone taking out a new policy. However, this could reduce the uptake of these products due to the extra effort involved.

The ultimate solution is hopefully much simpler. Personal electronic medical records would be ideal, allowing an insurer access to a client’s complete medical history from the outset. This would eliminate the need for disclosure and enable more accurate risk assessments.

However, this may still be some way off in South Africa. A more realistic option in the coming years is the use of artificial intelligence to collect medical information and assess client risk in other ways when a policy is taken out. Technology is advancing so rapidly that it should soon be able to deliver accurate assessments.

It’s now clear that waiting until the claims stage to underwrite a life policy is inherently problematic, as highlighted by the Ganas case. Insurers must move beyond this practice. Those that do so first, and do so successfully, may just give themselves a significant competitive advantage.

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Source: Moneyweb – Link