With the Insurance Act 2015 coming into force in recent weeks, are you up to speed? Freelance journalist and regular HI Daily contributor Sam Barrett speaks to intermediaries and insurers to find out what it means for the health and protection market
The Insurance Act 2015 came into effect on 12 August 2016, introducing changes to the legal regime surrounding commercial insurance. Although its primary focus is the general insurance market, as it also applies to group risk and health insurance policies, advisers and employers must ensure they are up to speed with the new requirements.
While most new pieces of legislation are inevitably met with some irritation as the requirements are bedded in and new literature printed, the industry has largely welcomed the new Act.
“It introduces a good, common sense approach that will be fairer for both customers and insurers,” says Chris Morgan, distributor partnerships manager at group risk provider Ellipse. “The group risk industry was already doing a lot of things contained within the Act so it has really helped to formalise many of these practices.”
Advisers also welcome the principles behind the Act. Catherine Stait, senior consultant for Aon Employee Benefits, does not expect to see any major changes in the way the group risk market operates.
“In theory there probably won’t be any significant changes in the group risk market as it had already adopted many of the practices,” she says. “However, no one can assume everything will be the same so it’s sensible for advisers and employers to make sure they’re ready for the new requirements now, rather than wait until renewal.”
The area where Stait believes employers may have the most work to do is with the duty of fair presentation, which replaces the duty of disclosure. Under the old rules, customers were required to disclose all material facts when they took out insurance. But, as this led to potential issues where they were unaware of what this encompassed, the duty of fair presentation of risks was introduced.
This new duty requires them to disclose every material circumstance which the insured ‘knows or ought to know’ or gives the insurer sufficient warning that it needs to make further enquiries. It also clarifies where this knowledge should be sought, which includes senior management as well as the person responsible for arranging the insurance and their external procurement team. Further, it states that this information should be provided in a clear and accessible manner.
Clearly this places much more onus on the employer and adviser to ensure the right information is made available.
Alan Sparks, research and development consultant at insurer Canada Life Group Insurance, says this is not always easy.
“An employer with lots of sites might struggle to provide information on who’s absent and why they’re off,” he says. “Where this happens we try to look favourably on them but, as a result of the Act, the employer and adviser will need to be more proactive at collecting this information.”
Iain Laws, managing director for UK healthcare and group risk at Jelf Employee Benefits, agrees. He says that while some organisations have consistent data platforms, which will make it easy to meet this duty, it is not always the case.
“The adviser is likely to play a key role in this data collection process,” he adds. “As well as being the focal point for the collection, an adviser understands what information is needed and can work with the insurer to understand any constraints.”
But, while the importance of providing accurate information could lead to more companies investing in systems to ensure this is provided to the insurer, Paul Moulton, intermediary distribution director at AXA PPP healthcare, believes the new duty of fair presentation will have little effect on much of the medical insurance market.
He explains: “The duty of fair presentation would be more of an issue in the consumer space where underwriting is more specific. In the group market, where we can accept business on terms such as medical history disregard, there is no need to disclose any previous conditions.”
However, where he does see potential conflicts is in the SME space, where some advisers are privy to claims information.
“Advisers will need to share this information with the rest of the market,” he explains. “Under the Act, this is regarded as material facts and must be disclosed.”
The duty of fair presentation could also lead to changes in the type of information that is collected.
John Dean, managing director at consultants Punter Southall Health & Protection, explains: “Insurers haven’t specified what sort of information they want from employers but, roll forward a couple of years, and we expect to see employers disclosing much more data. This is likely to include more information about what’s happening within the company, for example its approach to health and wellbeing, whether it has a smoking cessation programme and so on.”
This sort of detail can give a much better insight into the risk profile of company. For example, Dean says that insurers should be collecting data on the percentage of the workforce that is covered by medical insurance.
“Where only 10% of employees are covered by the policy you’ll see a higher claims ratio than if all employees were covered. This is a key data issue,” he explains.
Similarly someone with a £200,000 salary in London is likely to claim more on their medical insurance policy than someone earning £30,000 in Yorkshire.
“It could be down to them using a more expensive consultant but it’s also likely to be down to their higher expectations,” he adds. “I expect to see big growth in the way data is used in the underwriting process and this will lead to better pricing.”
The Act also makes new proportionate remedies available to insurers where a breach of the duty of fair presentation occurs. Under the old legislation, where incorrect data was provided that materially altered the risk, the only option available to an insurer was to cancel the policy, refund premiums and ask the employer to refund any claims already paid.
Under the new regime, although an insurer can still cancel the policy where they can prove the breach is deliberate or reckless, where it is a genuine oversight on the part of the insured they could take other steps. These are based on what the situation would have been if the breach had not happened and could include an adjustment of the premium and/or the claim payment.
While this could mean major changes in the general insurance market, Sparks says proportionate remedies were already being used within the group risk industry. “Insurers have always tried to be reasonable when it came to assessing whether to pay a claim where information wasn’t disclosed,” Sparks says. “When this was unintentional but the non-disclosure affected the risk, we would offer the employer the opportunity to pay the correct premium so we could still pay the claim. In these cases it’s about doing the right thing for the family of a deceased employee.”
This approach can be evidenced in the number of claims that are paid across the group risk industry. According to protection claims figures published by the Association of British Insurers and Group Risk Development, 97% of group and individual protection claims were paid in 2015.
As this approach has always been in place in the group risk market, some of the insurers have opted to contract out of proportionate remedies provisions within the Act (schedule 1, paragraphs 6 and 11). This is perfectly acceptable providing the customer is not in a worse position as a result.
Ellipse is one of the insurers that has taken this step, preferring to take a more black-and-white approach to the way payments would be treated in the event of non-disclosure.
Morgan explains: “We explicitly say that, where non-disclosure is accidental, we would charge the additional premium to enable us to pay the full claim. If the employer is in administration, it can be difficult to get this additional premium but by contracting out of this section of the Act, we have more rights to it. We don’t want there to be any downside for the employee and their family.”
While there’s plenty of focus on the importance of fair presentation and the actions insurers can take in the event of non-disclosure, the Act also clarifies the position with regard to fraudulent claims. Although the insurer has no liability to pay a fraudulent claim and can cancel cover at that point and retain any premiums that have already been paid, it will remain liable for any legitimate losses that occurred before the fraud.
AXA PPP’s Moulton says this is a step forward.
“There was some confusion around how an insurer could respond to previous claims in the event of policyholder fraud but the Act has been much more explicit,” he says. “It has helped to clear this up.”
Updating legislation that is more than 100 years old is always likely to result in changes. But, while there is inevitably some work for employers, advisers and insurers to undertake to ensure compliance with the new Act, most believe the new requirements will have long lasting benefits for the group risk and medical insurance markets.