By now most people are aware of the Law Commission's consultation on the subject of non-disclosure. If you're not aware of this you can download the consultation paper from their website.
It was surprising last week to hear views on the contents of the paper being given so quickly after its release, given the amount of detail involved in the paper and the depth that the impact of the Law Commission’s suggestions could have. Amongst those early views it’s clear that some people in the industry are convinced that the Law Commission's ideas are all positive.
Their suggestions include a ‘non-contestability’ period being introduced which means after a set period of time into the product’s term (3-5 years), in the event of a claim after that period and in the event of non-disclosure, providers will have to prove “beyond reasonable doubt” that the client non-disclosed fraudulently in order to decline the claim, helping to remove accidental non-disclosure as an issue.
The Law Commission's suggestions appear positive at first glance, and could help to improve consumer trust of our industry. Dig down deeper though, read it a few times and think their suggestions through more carefully. It’s really not that simple.
I got together with Debbie (Royal Liver’s chief underwriter) and ‘The Prof’ (Mark Davies) a few days ago to brainstorm the potential impact of the Law Commission’s suggestions. We did a positive/negative impact assessment ahead of writing our official response.
And here’s what we came up with:
- Increased consumer confidence – as they believe providers won’t try to duck out of paying claims;
- Slightly reduced claims administration – as providers would spend less time challenging claims;
- New providers would gain – as those around longer with bigger books would be more under threat due to paying out more, and
- Enforcing ‘pro-rata’ claims would be an option for the courts (rather than the ‘all or nothing’ approach currently used) with detailed rules in place to govern how that could work – those rules don’t exist at present.
- Not being able to challenge claims will result in higher premiums as providers pay for the increase in their liabilities;
This could lead to a market war on the non-contestability periods where Provider A has a three-year period but Provider B has two years - making things more complicated for advisers when selecting providers when we need to go the opposite way. This could end up like a deferred period on IP products where consumers pay more for shorter non-contestability periods. Another increase in premiums anyone?
Such increases in cost could be the death of critical illness cover on guaranteed rates – it would be too expensive. Reviewable CI rates may also be under threat and CI cover could become renewable in order to allow customers to continue to afford it. Renewable cover could be removed by providers with no challenge at the time of review. But is that treating customers fairly?
These changes could be applied retrospectively to providers existing books too. That means much higher costs of claims with no increase in the premiums. Some providers with huge fixed cost models could actually go out of business. Could it create more financial strength issues?
The law could be applied differently, to different timescales, in England & Wales compared to Scotland. More complications!
And there was me thinking protection was supposed to be simple!
As you can see, some of those negatives are scary. If costs go up so high that no-one can afford to buy life cover in the first place then we won’t have a non-disclosure problem – but that’s the wrong way to do away with it!
I need a lie down in a dark room…
Andy Milburn is IFA market manager at Progress from Royal Liver.
The views expressed are those of the author and not those of the company he represents.IFAonline
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