Tower is going all out, committing to introducing a key consumer protection that’s at the upper end of what the Government’s proposing to implement through a law change.
The New Zealand insurance company wants to ensure that provided customers accurately answer all the questions it asks; they won’t have their claims declined on the basis of non-disclosure.
Under the current law, an insurance contract can be cancelled if an insured doesn’t tell their insurer information that would influence its judgement in weighing up their risk, writing and pricing a policy.
The insured has to disclose this information regardless of whether they’re specifically asked to do so. They can also have their claim declined regardless of whether there’s a connection between the omitted information and the claim.
After decades of lobbying by the likes of the Law Commission and Insurance and Financial Services Ombudsman, the Government in March last year began a review of this law. In April it released a discussion document proposing ways to remove some of the burden from consumers when they engage with insurers.
It hasn’t decided on which route it will take, but Tower is committing to changing its approach in line with one of the options put on the table.
It essentially wants to use the same model the UK does, whereby the duty of disclosure is limited to the questions asked. So rather than trying to guess what the insurer needs to know about them, consumers simply have to answer all the questions they’re asked accurately.
Tower CEO Richard Harding said: “All customers will have to do is answer the questions we ask truthfully.
"We’re doing this because we trust our customers to be honest with us, and in turn they can trust that we’ll pay their claim. It’s about giving our customers certainty."
Removal of catch-all questions a red herring
Harding said the catch-all, “is there anything else you would like to tell us?” sorts of questions would be removed from Tower’s “systems, processes and policies” by the end of the year.
He also said that Tower’s new approach would see it ask customers a “small series” of additional questions.
Tower said it was still working through the details around what these questions would be, and whether it would include a clause in its policies specifically saying something along the lines of the insured’s duty of disclosure being limited to the questions asked by Tower.
Keegan Alexander partner Crossley Gates said including such a clause was essential, as otherwise the existing law would still apply.
Indeed, AA Insurance said it “would not void a policy based on a question or an update that we have not specifically asked the customer”.
Yet without any clauses in its policy documents clarifying this, it can’t be guaranteed.
IAG also noted it had removed catch-all questions from its consumer AMI and State brands.
IAG seeks a more proportionate response
IAG, in its submission to the insurance contracts law review, said it preferred the Australian approach to disclosure whereby the duty lies with the insured to disclose what a “reasonable person” (rather than a “prudent underwriter” as is currently the case) would know to be relevant.
It said that the Government made an “unfounded presumption” that customers didn’t understand what they needed to disclose.
Based on the fact that in the year to May 2018 it only referred one in 200 claims to its specialist team to do a “prudent underwriter test” over concerns of potential non-disclosure, at which point much of the missing information was deemed immaterial anyway, it believed the “vast majority” of consumers understood what their obligations were.
It said of its total policies in place, only 1 in 20,000 were cancelled or declared void in the year to May 2018.
“It would be extremely concerning if a regulatory solution was designed to cover for the 1 in 20,000, at the expense of the certainty and predictability of the entire insurance industry,” it said.
A business case for asking more questions
MinterEllisonRuddWatts partner Andrew Horne favoured the UK model over the Australian one because it was clearer.
He said consumers should perhaps expect to have to answer more questions at underwriting, yet made the point this could give insurers the opportunity to more finely tune their pricing. This is part of Youi’s business model for example.
Tower has recently highlighted its focus on being more selective over the risk it takes on to bring it back into profitability.
It’s promoted its move towards risk-based pricing; more aggressively charging high-risk (particularly earthquake risk) customers more, and low-risk customers less.
In the first half of the 2019 financial year it paid less in claims relative to what it received in premiums, compared to the previous year and the industry norm, partially due to “improved pricing, underwriting and risk selection”.
“We will ramp up underwriting and pricing improvements to drive profitability,” Harding told investors at Tower’s results briefing in May.
Legislation to amend the country’s insurance contracts law is expected to be introduced to Parliament in mid-2020.
The other major player in the general insurance sector, Vero, hasn’t responded to interest.co.nz’s inquiries on the matter. While IAG provided interest.co.nz with its submission, these haven’t yet been published on the Ministry of Business, Innovation and Employment’s website.