The Ethics of Claims Assessment Practices

in the South African life insurance industry An actuarial perspective Paul Lewis & Johann le Roux

AGENDA

1. Introduction

2. The case study

3. Recent South African experience

4. A global perspective on claims assessment

5. Many questions and issues to consider …

6. The fundamental principle of acting in good faith

7. Protecting the financial integrity of the industry

8. Applying three classic ethical thinking strands

9. Applying a more esoteric approach

10. Blurring the lines - expectation or obligation?

11. Meeting the actuarial promise

12. Concluding remarks

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1. INTRODUCTION

CAVEATS AND ACKNOWLEDGEMENTS

• SCOR Africa & global colleagues

• Various legal and FAIS professionals

• Client confidentiality to be respected

• Paper reflects personal views

PURPOSE OF WRITING THE PAPER

• Contribute to the industry debate

• Apply classic ethical thinking to a real life case study

• Broader thinking – perhaps room for a more esoteric interpretation?

• Evaluate the role of actuaries in fulfilling their professional promise

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2. THE CASE STUDY - SUMMARISED

• Material medical non-disclosure (positive misrepresentation)

• Client died in a violent crime event, unrelated to his state of health

• Claim repudiated in full by insurer (no policy would have been issued in the first place)

• Ombudsman for Long Term Insurance supported the insurer’s decision

• Independent reinsurer supported the underwriting approach

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2. THE CASE STUDY – POLARISED OPINION

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WHAT IS FAIR

AND WHO DECIDES?

WIDOW’S INSURANCE FIGHT

DISPUTED CLAIM

– THE OTHER SIDE

INSURER’S DECISION

AND MOB RULE

INSURER URGES PEOPLE TO FULLY

DISCLOSE WHEN APPLYING

SEVERAL FAMILIES BENEFIT

FROM INSURER’S NEW SOLUTION

3. RECENT SOUTH AFRICAN EXPERIENCE

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[ASISA Media Release: Fully underwritten individual life policies pay a record R15.1 billion in

claims in 2018; 26 August 2019]

6

Year % of claims paid # claims paid Rand value

2012 99.0% 34 724 R6.8 bn

2013 98.9% 36 199 R8.4 bn

2014 98.9% 36 421 R10.3 bn

2015 98.9% 35 983 R12.3 bn

2016 99.3% 35 347 R13.1 bn

2017 99.3% 34 100 R14.4 bn

2018 99.3% 33 545 R15.1 bn

4. A GLOBAL PERSPECTIVE ON CLAIMS ASSESSMENT

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[Source: SCOR Africa]

7

Jurisdiction Contestability Remedies

USA & Canada Only contestable in first 2 years;

insurers often re-underwrite in

first 2 years

Rescind fully in first 2 years even if no claim;

after 2 years rescind if fraudulent

misrepresentation

United Kingdom Strong TCF framework; no

explicit contestability rules;

unlikely to investigate death

claim after 5 years

Depend on nature of misrepresentation; if

innocent pay claim in full; if careless apply

proportionate remedy; if deliberate or

reckless decline the claim

Germany no explicit TCF; 5 or 10 year

contestability periods; insurers

thoroughly investigate misre-

presentation in first 5 years

Depend nature of misrepresentation; if

innocent or negligent misrepresentation 5

years; if deliberate or fraudulent

misrepresentation 10 years;

5. MANY QUEST IONS AND ISSUES TO CONSIDER …

• What does it mean to act in good faith?

• What is the role of the financial adviser ?

• How informed are clients about how things work?

• How important is the financial sustainability of the insurer?

• Are industry claims practices fair, legal and just?

• How well do life insurers connect with their clients’ expectations?

• Can we use classic moral philosophies to solve these dilemmas?

• How can product actuaries promote a culture of trust?

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6. THE FUNDAMENTAL PRINCIPLE OF ACTING IN GOOD FAITH

ACTING IN GOOD FAITH

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• Cornerstones of insurance and contract law; all parties to act with honesty (bonae fidei)

• Disclose material information = what a reasonable, prudent person would deem relevant and material

• Negative misrepresentation (omission) versus Positive misrepresentation (provide false info)

• Are financial advisers and clients adequately informed?

• What level of understanding around “matters of materiality” can the insurance industry expect from a “reasonable” South African?

• Do insurers place client interests at the heart of their business practice when they apply judgement around “matters of misrepresentation”?

• How does current industry practice align with our society’s broader “sense of justice”?

HOWEVER …

7. PROTECTING THE F INANCIAL INTEGRITY OF THE INDUSTRY

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All lives insurable;

One unhealthy life

misrepresents

All lives insurable;

All unhealthy lives

misrepresent

All unhealthy lives

are uninsurable;

all misrepresent

0,1% loss 50% loss 495% loss

Model assumptions: Similar sum assured; 50% of lives “unhealthy” with 100% extra mortality

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Duty-based ethics

Action to conform to duty

Contractual obligations

Regulatory & Compliance

Codes of Conduct

Virtue-ethics

Action that of a good person

Character of the business

Values and Care

Reputation

Consequentialism

Action to seek best outcome

Goals and Objectives

Maximise gain; Minimise harm

The end justifies the means

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

Duty to act in good

faith, but what does

this mean?

If claim declined,

financial ruin of

beneficiaries

Misrepresentation

implies a lack of

integrity from client?

Was client informed?

How will my family

deal with this?

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

Legal action against

insurer if premiums to

increase?

Increasing premiums

will jeopardise

affordability;

TCF compromised;

claim uncertainty;

Do I want to do

business with insurer

that condones

fraud? Its good to

know that I do

business with an

insurer that cares

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

To honour all

contractual

obligations

Financial soundness;

Is abuse of staff ok?

Loss of trust in brand

and the industry?

Does empathy

trump fraud?

Reputational risk;

What does it say

about my values?

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

Ombudsman process

support duty-based

decision-making

Pressure on

Ombudsman? How

to balance solvency

and TCF principles?

Reputational risk if

not seen to act in

public interest; FSCA

and PA unsure?

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

Challenge

“sense of justice”

Trigger of violent

crime; Society

happy to pay higher

premiums?

Relevance of

insurance?

Very polarised;

Majority of pathos

with family;

Reinforce industry

reputation for not

paying claims

8. APPLYING THREE CLASSIC ETHICAL THINKING STRANDS

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Client & Family Other

Policyholders

Insurer & Industry Regulator Society

Duty to act in good

faith, but what does

this mean?

We acted in good

faith, expect others

to do so also? Legal

action against insurer

if premiums to

increase?

To honour all

contractual

obligations

Ombudsman process

support duty-based

decision-making

Challenge

“sense of justice”

If claim declined,

financial ruin of

beneficiaries

Increasing premiums

will jeopardise

affordability;

TCF compromised;

claim uncertainty;

Financial soundness;

Is abuse of staff ok?

Loss of trust in brand

and the industry?

Pressure on

Ombudsman? How

to balance solvency

and TCF principles?

Trigger of violent

crime; Society

happy to pay higher

premiums?

Relevance of

insurance?

Misrepresentation

implies a lack of

integrity from client?

Was client informed?

How will my family

deal with this?

Do I want to do

business with insurer

that condones

fraud? Its good to

know that I do

business with an

insurer that cares

Does empathy

trump fraud?

Reputational risk;

What does it say

about my values?

Reputational risk if

not seen to act in

public interest; FSCA

and PA unsure?

Very polarised;

Majority of pathos

with family;

Reinforce industry

reputation for not

paying claims

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EXTREME VIEWS ARE CLEARLY NOT HELPFUL

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ST ILL I TCHY

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STANDARD CASES

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CASUISTRY

STANDARD CASES

USURYCAPTAIN

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STANDARD CASES

SURGERYNO PERFORMANCE IMPACT

DRUGSHUGE

PERFORMANCE IMPACT

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Cast i Connubi i papal c i rcular

of 31 December 1930, Pope Pius XI

“

.”

STANDARD CASES

CONDOMS/DIAPHRAGM RHYTHM

METHOD

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DISORDERED ATTACHMENT

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VIRTUE

IMPACTRULES

STANDARD CASES

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ST ILL I TCHY

10. BLURRING THE L INES - EXPECTATION OR OBLIGATION?

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It seems a just expectation to honour your obligations.

But is it an obligation to meet another’s expectation?

10. BLURRING THE L INES - EXPECTATION OR OBLIGATION?

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• The language of obligation creates strong client entitlements;

clients certainly hold a right to corrective action

• The language of expectation less onerous, but clients will be

disappointed if their expectations are not met. Do they hold a

right to corrective action?

• Relevance of life insurance industry anchored in its claim promise

The Six TCF Outcomes

• central to culture

• products meet needs

• clients are informed

• suitable advice given

• products perform as

expected

• no post-sale barriers

Urgent need to pro-actively manage client expectations

11. THE ACTUARY’S PROFESSIONAL PROMISE

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On Building Trust

11. THE ACTUARY’S PROFESSIONAL PROMISE

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On Building Trust

Competence

11. THE ACTUARY’S PROFESSIONAL PROMISE

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On Building Trust

Competence

Character

11. THE ACTUARY’S PROFESSIONAL PROMISE

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On Building Trust

Competence

Character

Connect

11. THE ACTUARY’S PROFESSIONAL PROMISE

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Code of Professional Conduct On Building Trust Actuaries to Action

Knowledge and expertise Competence Use actuarial expertise to simplify product

outcomes

Ethical behaviour (act with integrity) Character

Alignment of underwriting, claims and

pricing practices

Benefits to match client expectations

Professional accountability Connect

More than just judicial fairness; understand

duty of care to all stakeholders; pro-active

communication of how things work

12. CONCLUDING REMARKS

KEY INSIGHTS

• Life insurance is a necessary good for society

• Poor client and societal awareness of how things work

• Difficult to engage in an ethical dialogue on any media platform

• Many different stakeholder needs to consider!

• Complexity of product and process

• Better expectation management

THE WAY FORWARD

• Life is not just about judicial fairness

• Perception informs reality ; it is what you do that informs perception

• Future relevance of industry paradigm

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The Ethics of Claims Assessment Practices

in the South African life insurance industry An actuarial perspective Paul Lewis & Johann le Roux