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The Momentum lesson: Following the law is not enough

Financial services sector has to move past compliance.

When Momentum declined to pay out Nathan Ganas’s life insurance policy, it wasn’t being malicious. It wasn’t even being greedy. It was following the law.

It also wasn’t the first life insurer to refuse a claim on the grounds of a non-disclosure that had nothing to do with the cause of death. There are a number of people in the industry who have acknowledged that their underwriting may well have come to the same conclusion.

Legally, their argument is sound. Ganas had a condition that would have precluded him from being insured in the first place. He should not have qualified for life cover, and therefore the claim should not have been paid out.

The reason really is to protect everyone else that Momentum has insured. They are all in the same risk pool that has to be carefully managed. If large numbers of people are not paying premiums that match their level of risk, the sustainability of the pool as a whole could be jeopardised.

The regulator says…

Why then, was there such an outcry? And why has the Financial Sector Conduct Authority (FSCA, formerly the FSB) noted that Momentum’s decision to change its mind and pay out the Ganas claim “reflects the spirit of discussions between the FSCA and Momentum”?

This is quite a statement for the regulator to make. It makes it clear that it is no longer satisfactory for financial services companies to show that they are following the law. They have to show that they are acting with fairness and in the best interests of their customers.

Consider that a life insurer could be accepting premiums from a client for decades only to refuse the claim at the time of death on the basis of a non-disclosure. There’s an asymmetry there that needs to be addressed.

Surely it is fair to ask what the company was doing during all of that time to make sure that it was accepting those premiums in good faith? Shouldn’t it take responsibility for ensuring that it is going to deliver value for money?

Bear in mind that, 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 take back to the store if it doesn’t work. You only know 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

It’s true that there is a reciprocal relationship in 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 giving your medical history.

However, consider the variables in play. Firstly, you are relying on your memory. Can an insurer genuinely expect you to remember all of the things you may or may not have been diagnosed with, particularly if you do not receive ongoing treatment?

You might also not know what is significant and what isn’t. It’s fine to say disclose absolutely everything, but there’s only so much room on the form.

Terminology can also be an issue. Do you suffer from paraesthesia, for example? You do if you have pins and needles, but would you necessarily know that?

What about the role of the broker who helped you take out the policy? There is anecdotal evidence of brokers disregarding parts of a client’s medical history when filling out the medical history to ensure that policies are not rejected.

While the standards of financial advice are improving, there is no question that there are still brokers whose primary interest is in getting the policy through so that they can earn the commission. It’s wasted time for them if the insurer rejects an application.

It is even possible that a doctor may have made a diagnosis that you were never informed about. You can’t disclose information you never had, but the insurer could reject your claim because of it.

Solving the problem

Given all that can go wrong, can insurers then still in good conscience place all the responsibility on the client? That is a question that the industry now has to face with a great deal more introspection.

In the short term, this may require some kind of trade-off. Insurers need to protect their risk, and that may mean that they will ask for more thorough medical tests upfront from everybody taking out a new policy. That’s not ideal either, however, as it would almost certainly reduce the uptake of these products because of the extra effort involved.

The ultimate solution, however, is hopefully far simpler. Personal electronic medical records would be ideal, in that a client’s entire medical history would be available from the start. There would be no disclosure requirement, and insurers could make more accurate risk assessments.

That, however, may still be some way off in South Africa. What may be more realistic in the next few years is using artificial intelligence to both collect medical information and assess client risk in other ways when the policy is taken out. The technology is developing so fast that it will surely be able to deliver accurate assessments before too long.

It is now obvious that waiting until the claims stage to underwrite a life policy is inherently problematic for the reasons the Ganas case has highlighted. Insurers have to move beyond that. Those that do it first, and do it successfully, may just give themselves a big competitive advantage.

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You present a strong case Patrick for taking away the “risk factor” from the decision makers but ultimately it’s a matter of judgment, the human factor that Momentum got wrong.

The Momentum debacle highlights a serious problem which the financial industry at large faces, the human factor which we call ethics. We can learn/study ethics until we are blue in the face, but if it is not in your soul you remain blind to it. Actually, it’s a spiritual condition.

Dearest Patrick:
1. You surely realize that doing actual medical tests on everyone at application stage will escalate costs – and therefore premiums- dramatically – even for the honest among us.
2. Verifying at claims stage the information on which the original underwriting was done, is NOT underwriting at claims stage.
3. Legal precedent across the globe indicates that Momentum’s original decision, supported by their international reinsurers AND the Jugde who leads the Onbudsman office, was the only one that is correct.
4. Without the law that controls the ‘moral hazard’ created by insurance, insurance cannot exist.
Momentum have created a monumental problem for the entire industry to undo.

1. I didn’t say that this wasn’t problematic. In fact, I acknowledged that it is. Requiring medical tests on every new policy is unwieldy and impractical. But this is precisely my point. There has to be a better, more innovative solution. The insurer who gets this right first is going to be at a big advantage.
2. You can argue semantics, but it amounts to the same thing. The information on which Momentum’s initial decision was based was known at the time of the policy being written. Why didn’t they verify it then instead of accepting premiums for years and then only asking whether they should have done so when the claim was made?
3. Just because something is legal does not make it right. Until only about 100 years ago the legal position across the globe was that women couldn’t vote. I could have used your argument then to support that position, but I would still have been wrong.
4. I disagree. This is not a problem that needs to be undone. It is a monumental challenge that now needs to be met. The industry needs to get away from the attitude of ‘well, it’s always been done this way’ and come up with a better way of doing things.

2.) I agree, how did they find out about the blood sugar levels afterwards? There should be some investigation at sign up. Banks do credit checks so why would life insurers do nothing?

3.) Really irrelevant, we are not talking about a unethical law here. Non-disclosure is unethical in itself.

4.) Yes but what is the solution outside of paying more claims and driving up premiums? What happens when a drunk driver gets hit by a bus and killed, do you pay out as it wasn’t there fault despite them being on the road illegally.

1. You seem to be arguing for more (very costly) medical tests and management time costs – thus much greater premium costs and inconvenience for the majority honest applicants.
2. It is hard to understand why you feel that it is “semantics” to state that fact checking is not underwriting.
3. They changed the law 100 years ago to allow woman to vote -AFTER which women voted. If 400 years of legal precedent is wrong, the law surely needs to be changed. Until then however, all members of society’s terms expected to act within the extant law. Indeed, all pricing is based on it. This surely applies across the entire market?
4. No doubt that if there is indeed a better way to do this, it will be invented in time. Until then, what is a poor fellow to do , but abide by the law and practice?
I too wish there was a better immediate answer. Find an alternative and better solution to ‘moral hazard’ and we are all on sides.

1. No, I’m arguing for innovative solutions so that costly medical tests and management time costs are not necessary.
2. As I said: it amounts to the same thing.
3. Society often moves ahead of the law. Remember that this is not my position. The regulator has taken the stance that Momentum was wrong not to pay out the claim. The industry is therefore left with no choice. It has to move past what the law says.

Yet another article insinuating that it is acceptable to lie on the application form and the onus is on the insurer to catch you.

The onus is always on the insurer to verify what’s on the application form. It always has been, and always will be. The question is only when that verification should take place.

The insurance bots are out in full force today.
The man in the street (the ordinary people leeched for years by the insurance industry) will support your argument.

So it’s ok for the client to lie ?
And if, at application stage, the insurer finds out you lied about your medical history ? Do they lay a charge of fraud/ attempted fraud ?
Why don’t we all just lie when we apply for insurance ? Or ate some of us honest ?

Of course lying on an application is not acceptable. That’s not my point. Both the insurer and the insured need to be protected. The only way for that to happen is for there to be an impartial fact discovery at the stage that the policy is written.

You agree that lying on the application form is unacceptable, yet you defend this client’s dishonesty ?
It’s ok he lied. The onus is on the company to catch him.
Let’s all lie on our tax returns. It’s up to the Receiver to catch us.
Dishonesty is the best policy.

Momentum crossed a line. Any person taking out insurance may have unknown health problems. Death, coming from other directions, may result in detecting this. Checking the application record it shows no mentioned of found problem. Verdict, no payout. To proof otherwise will be impossible. Death do not speak. The crossed line, for this reason only, deleted all reasons for taking out life insurance.

You don’t have to disclose unknown problems. Only problems you know about because you tested positive for it, or was diagnosed by a doctor.

Personal electronic medical records are already available, at most medical aids, and disclosure only needs permission from the member.This would close the loophole insurance companies so eagerly search for.

Difficult one, I think Momentum handled this one really badly as they should have settled with the family before it even hit social media, now they have opened a pandora’s box of potential claims.

I suppose a question not posed here is whether the risk pool was actually impacted by this situation. If he was paying premiums (even though he should not have been insured) and died in a shooting then that does not have a real impact on the pool. If he had died from diabetes then yes I’d say it has negatively impacted the other customers but not if he was shot in theory.

I do think insurers have to do some sort of DD before accepting life clients, surely a blood sugar, aids and blood pressure test is not that hard to do. The rest should be based a medical history check.

Lastly, the biggest problem with paying out that claim is now people know they can get away with non-disclosure and still get paid out claims. They should have deducted the additional premium he would have paid if he was honest in the first place.

Yes, Momentum where wrong. If under witting changes in the future, stating that if there were non-disclosure at any stage, which would have implicated risk, they can fall back to an Accident benefit which could be determined as a % of the life cover. I am not clever enough to make the calculations. And then Patrick, it is disgraceful to comment on brokers just wanting to sell the policy for commission, after how many years have you not learned to understand brokers are always at risk and their renumeration is paid in the form of commission. We do not attack journalist for getting paid for incorrect articles,or false news, not that I am suggesting yours is factually wrong. After 38 years in the industry, I feel like vomiting every time someone claims I am just working for the commission and nothing else. It is more than bad taste, and you should refrain from falling in that trap.

I don’t like the reality any more than you do, but just because something is unpleasant doesn’t mean we shouldn’t write about it. I know that the industry is getting more professional, and I know that there are fewer brokers operating like this, but there are still too many of them out there to be ignored. It’s a reality, and clients should be aware of it.

And if I get anything wrong, I absolutely expect to be criticised for it. I couldn’t expect otherwise given the Moneyweb comments section.

I’m sorry Patrick, but you’re all over the show here. While you make some good points, your logic is flawed in a number of cases. A broker who disregards part of the medical questionnaire is committing fraud. A very good principle in our law is that you must seek your confidence where you’ve left it. In this case, if the broker is a tied agent the insurer may be vicariously liable for the broker’s actions. If not, the client (or family) has all the remedies of the FAIS Act to act against the broker, which includes financial compensation. To saddle the insurer in a case like that with the liability is to open the door to exactly the increase in risk and cost for the whole insured pool that you are referring to. To be dishonest when contracting is never cool.

Your argument is fine in theory, but how does the family prove that their deceased relative disclosed something to the broker, but the broker didn’t put it on the form? That seems like an impossible hurdle. Far better to remove the possibility altogether.

He had blood tests 5 times in three years. That’s not the sort of thing the man in the street would forget. He signed the form to confirm all answers are true and accurate.
But please, Patrick, answer the question in my previous post ….

And if, at application stage, the insurer finds out you lied about your medical history ? Do they lay a charge of fraud/ attempted fraud ?

If not, we may as well all take the chance and lie.

This excel calculator might help posters here understand the impact on life insurance premiums due to moral hazard and adverse selection if insurers can no longer repudiate claims where material non disclosure is not related to the death.

http://www.filedropper.com/termlifepremiumcalc

A few thoughts:
– premiums underpaid due to non disclosure can only be recovered when there is a claim. The majority of life insurance policies never pay out, and are priced with this in mind. 40-60% of whole life policies never pay out, and more than 95% of term life policies never pay out.

-even when they pay out, in 50% of cases more was paid in premiums than was paid out.

– the pool has to carry the risk not only of the minority of policies that pay out, but of all policies in place at a specific time.

– the vast majority of the under recovery on policies with non-disclosure issues can never be recovered because they never pay out. If claims are no longer repudiated where material non-disclosure exists the pool will be exposed to the risk associated with such non-disclosure even on those policies that will never pay a claim. If the actuaries fail to price this risk there will be significant under recovery and the scheme’s funds be insufficient to pay all claims.

– abandoning that policy will also lead to adverse selection for various reasons, including ignorance, outright fraud and to get insurance cover for other causes of death in circumstance where the disclosure will result in the application being denied or the premiums being unaffordable if granted.

-this will start a vicious cycle of increasing premiums, discouraging honest people from getting insured and incentivising dishonest people to get insurance, thereby continuously increasing the pool’s risk.

-those seeking insurance of any kind need to realise that an insurance application is a document that needs to be filled in with care and diligence. It cannot be left to a third party.

-more medical tests prior to issuing a policy will not do much to mitigate the above risks because routine tests can only test for a few conditions, and if patients are on medication these tests will be negative. More advanced testing will make life insurance too expensive for most.

-an electronic medical history database as suggested above will potentially solve this problem

It’s simple. Life assurers need to build in a “natural causes” premium, and an accidental death cost. Underwriting on the natural causes portion is greater than on the unnatural causes, so you are therefore building in an accidental death benefit automatically into a life policy. Client dies from unnatural causes, as in the Momentum case, health factors have no bearing on the risk. Pay out completed in a day or so, unless of course foul play is suspected. This may even reduce the cost of loadings

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