The Law Commission is considering introducing a ‘non-contestability' period into life insurance policies, which would make insurers prove non-disclosure within a set period of time.
In its latest issues paper, the Commission suggests insurers should only be allowed to turn down a claim on the grounds of non-fraudulent non-disclosure if they prove the non-disclosure within three years of the policy being taken out.
The proposal was first raised by the Association of British Insurers’ (ABI) protection committee, which claimed introducing a non-contestability period could help re-build trust between consumers and insurers.
A similar system operates in the US, where insurers can only turn down a claim on grounds of non-disclosure if they prove it within the first two years of a policy.
Nick Kirwan, protection market director at Scottish Widows and head of the ABI’s protection committee, suggests introducing a non-contestability period could help restore consumer confidence.
He states: “We’d be saying to consumers that if you’ve made a genuine mistake we won’t hold it against you forever. The question is one about reasonableness. If we make the promise in writing then we would be being upfront and clear about what should be good practice anyway.”
But Kirwan favours a non-contestability period of five years, rather than the three years proposed by the Law Commission or the two year period in the US, because the UK sells a lot of critical illness (CI) cover, whereas the US mainly sells life cover.
With life cover, the policyholder has to die before the policy pays out, whereas a CI policyholder can claim during their lifetime and there is therefore more scope for fraudulent non-disclosure, meaning a five-year period may be more appropriate.
An issue the Commission does not cover in its paper is whether the non-contestability period would only apply to policies which come into force after the proposed rule change or whether it would apply to existing policies where a claim arises after the rule change.
Kirwan suggests there will be a lot of pressure for the latter and he urges insurers to think about changing their underwriting systems now to cope with the changes.
Another consequence of the proposal is it could make it difficult for intermediaries to re-broke policies because each time a policy is changed the three year period would start again, thus losing the consumer’s added protection.
Kirwan states: “Advisers will have to weigh the benefits of a new policy against losing the added protection.”
Roger Edwards, products director at Bright Grey, warns premiums could go up if insurers have to pay more claims as a result of not discovering the non-disclosure within three years.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Emily Perryman on 020 7968 4554 or email [email protected].IFAonline
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