Paying valid claims does not make you special

It is concerning to see many providers in the life insurance space are promoting their brand on the back of paying out all valid claims, as if this is a unique selling proposition. This trend should be dismissed with contempt, as paying valid claims is a contractual obligation and the bare minimum industry standard.

The notion that insurers believe they are doing something special when paying a claim is echoed in the Long-term Insurance Ombudsman's 2016 report, where it identified "insurer behaviour that suggests that a claim is being avoided at all costs. This is where the insurer is evidently/demonstrably looking for reasons not to pay what appears to be a valid claim, often by raising a new defence if the original reason for declining a claim does not succeed."

So, while many insurers pay out valid claims on the face of it, it often only happens after they go to great lengths to invalidate these claims.

This should be of grave concern to the industry at large. Invalidating valid claims is unethical and goes against good governance principles. Moreover, this shapes the perception among the broader consumer market that insurers attempt to find reasons not to pay claims.

Price pressure

One potential reason for this situation is attributable to increased market competition. This drives the trend of undercutting premiums as a market penetration strategy and new business acquisition tool among both individual and group risk providers. This results in an undignified race to the bottom, using price as the only differentiator between various insurance products.

Lower premiums impact on the viability of the product, which creates a perverse incentive for insurers to look for ways to avoid pay-outs by invalidating claims.

Ultimately, policyholders get what they pay for in terms of cover. While lower premiums may look like an attractive proposition, policyholders should also feel comfortable that their insurer of choice will indeed pay out all valid claims.

Defining valid claims

In addition to claims that are invalidated, negative market perceptions may also be perpetuated when consumer expectations are not met due to misunderstanding of what constitutes a valid claim. This often stems from a lack of clarity in the definitions contained in policies. In some cases, these definitions are intentionally vague.

For example, a doctor may medically board a patient for clinically relevant reasons, which can create certain expectations for policyholders. However, the medical definition of this disability may be incompatible with the specifically worded definition contained in the policy.

In terms of critical illness cover, while numerous conditions are still paid out on diagnosis based on specified medical criteria, others are now paid out on illness severity. This severity is determined by factors such as the policyholder's ability to continue working, the ability to cover medical costs, the loss of insurability or a notable loss of quality of life. Similarly, disability claims are evaluated based on the functional implications of the condition, rather than the diagnosis alone.

Reducing complexity

Clear policy wording should therefore be an imperative to any insurer. There can be no ethical reason for an insurer to sell a policy to someone who doesn't understand what they're buying.

From the policyholder's perspective, they need to ensure they are purchasing an insurance product that will provide the cover they require, whether there is an advisor involved in the process or not. They also need to understand the conditions under which a claim will be paid or declined, as explained in the policy. When a product is difficult to understand or unnecessarily complicated, it should raise a red flag.

Full disclosure

While ethical behaviour from insurers in validating claims is imperative, policyholders also need to ensure they meet the policy requirements, such as full disclosure at the policy inception stage. The information provided by the policyholder is used to rate risk and determine the premium. If a policyholder benefited from a lower premium because of a material non-disclosure at the underwriting stage, the insurer would be well within its right to decline a claim. This also protects the insurer from individuals who may try to exploit insurance policies for financial benefit, which is particularly prevalent during periods of depressed economic conditions.

Objective claims specialists

Ultimately, however, the onus is on the insurer to pay valid claims. The question is, in the assessment process, is the claims committee tasked with seeking reasons to invalidate a claim, or do they look for alternatives to find the best outcome for both the insurer and the customer?

To do so, they must be equipped with the education, knowledge and expertise to objectively deliberate on the facts and merits of each individual case, particularly the more complex cases, but must also have the empathy to understand their decisions materially impact on the lives of people; they're not merely validating or declining claims.

From an administrative perspective, assessing claims is not always clear-cut. For that reason, insurers that take a black-or-white approach seldom have the best interests of the policyholder at heart. When somebody submits a valid claim, it's because they need financial support. It's the fundamental purpose of insurance.

That is why good governance dictates insurers must process and deliberate all claims fairly, using established procedures to arrive at the best outcome for both the insurer and the policyholder, even if that means making partial pay-outs to meet financial shortfalls in cases where insurers are within their rights to invalidate a claim.

This principle of looking for reasons to pay, instead of making frivolous promises to do the bare minimum in paying all valid claims, is the standard all industry players should aim to achieve.

Walter van der Merwe is the CEO of Fedgroup Life. As South Africa's leading independent financial services provider, Fedgroup boasts 27 years of insurance and investment experience. Its independence has allowed it to offer its clients the unique combination of old-fashioned values and industry-leading technology.