Cutting through the confusion around trauma insurance

Many inconsistencies currently exist between different insurers in their trauma policy wording, especially when it comes to policy lapsing and reinstatement. Col Fullagar finds this can often cause planner confusion, losing them credibility when clients seek more information.

Insurers are forever looking for a strategic advantage over their competitors and they seek to lay claim to these so-called points of differentiation in as many different areas as possible.

Some see speed as their advantage – which probably translates to “If we make a mistake, we will make it faster than other insurers”. Others regard their documentation as a point of differentiation, which means “Advisers may dislike all application forms but they dislike ours the least”.

The truth is, however, that not all strategic advantages require insurers to be different. There are occasions when being the same, albeit seen as somewhat boring, could of itself be the strategic advantage insurers so desperately crave.

In the process, insurers may provide to advisers and clients the clarity and surety they too desperately crave.

The issue of sameness comes up from time to time, with a perennial contender being trauma insured event definitions.

In regards to this particular matter, however, the client and adviser value add may be less than assumed, with the cynic being forgiven for suggesting that consistent trauma definitions would simply mean all would be equally incomprehensible.

There are, however, areas within risk insurance where consistency would bring a clear advantage to all parties, and two of the most important of these are in the area of lapsing and reinstating of policies.

Lapsing

If insurance premiums are not paid, the policy will eventually lapse out of force and cover will end. The purpose of insurance is to provide financial protection, so therefore the loss of this protection is an event that deserves to be taken seriously.

Typical policy wording in regards to policy lapsing would be:

“If any premium is not paid within 30 days of its due date, your policy will lapse and no benefits will be paid.”

According to the policy, if a premium due on 1 January is not paid, the policy will lapse on 31 January. Of course, if that was what was consistently said, and what consistently occurred, this article would end right here.

At least one insurer states:

“If a premium is not paid when due, we will cancel the policy 30 days after we give you notice of cancellation in writing.”

While the 30 days is consistent, the date from which it applies may not be, ie, the 30 days dates from when the notice is issued rather than when the premium is due.

Another insurer states: “A period of 60 days of grace is allowed for the payment of each premium …”.

And yet another leaves those not legally qualified guessing by stating: “This policy will be cancelled and cover will cease if a premium is not paid in full by the date that it is due to be paid and after providing you with notice as required by the applicable laws”.

All this would be sufficiently complex for the adviser and the client, but not only do they need to contend with differing policy wording, they also need to bear in mind the insurer’s systems-generated notice and lapse process.

Sadly, for the client and the adviser, what is stated in the policy and what occurs in reality are not necessarily in alignment.

Several insurers were asked to provide details of their formal lapse procedure.

Insurer No.1

• 20 days before the due date a premium notice is generated;
• 10 days after the premium is due an overdue notice is generated;
• 31 days after the overdue notice is produced, a final overdue notice is sent out; and
• 10 days after the final overdue notice is generated, a policy lapse letter is sent out.

In other words, the policy lapses 51 days after the premium due date.

Insurer No.2

• 30 days before the due date a premium notice is generated;
• 13 days after the premium is due an overdue notice is generated;
• 14 days after the overdue notice is generated, a final overdue notice is produced, except for direct debit which is created after 18 days; and
• 30 days after the final overdue notice is generated a policy lapse letter is produced.

In other words, the policy lapses either 57 or 61 days after the premium due date, depending on the method of payment.

It is possible the adviser will receive copies of these notices, but consistency of procedure and delivery in this area was not checked.

No doubt, if questioned as to the reason for their particular lapse cycle, each insurer would respond “That’s just the way the system is programmed”. But if this is the case, is there any reason why the cycle, instead of being 30 – 13 – 14/18 – 30 days, could not be programmed as 30 – 15 – 30 – 15 days, which might be easier to remember?

Many advisers have horror stories they could relate about unintended mix-ups that occur when a client changes banks, moves from one address to another, or notification is simply not received.

When something does go wrong, one can only be left wondering what an adviser is forced to say to the client who calls and asks: “How long do I have to pay my premium?”.

The safety conscious adviser would be tempted to respond: “Well it is hard to say; let me have someone call the insurer and see what their particular lapse cycle is”. In doing so, the adviser will no doubt maintain safety at the cost of credibility.

Is there any reason why insurers could not get together and agree on a consistent lapse cycle between each other?

And surely the lapse cycle does not have to alter based on the mode of premium payment. How much safer and simpler would life be for the adviser and the client and how many lapses generated by misunderstandings could be avoided?

Reinstatement of policies

Having failed to appreciate the unique lapse cycle of their particular insurer, a client finds they need to reinstate their insurance.

Contact is made with the adviser who in turn contacts the insurer. The consistent response from the insurer is that a reinstatement form will need to be completed but …   And it is what comes after the “but” where further issues can be encountered, ie, the matter of collection of premium arrears.

Prior to considering the practices of insurers, the logical position will be considered.

For example, a premium is due on 1 January. It is not paid, however, cover continues through to 31 January by virtue of the 30 day period of grace. If claim occurred during this period, the outstanding premium would be deducted from any  proceeds payable. On 31 January, however, the policy lapses and cover ends. 

If the policy is reinstated – for example, on 31 May –  logically, premiums should only be collected for the period when cover applied (ie, January). It would make sense to also collect the next premium due in June.

The exception to this would be in regards to level premium policies where the maintenance of the original level premium rate is based on the assumption that all premiums are paid.

Thus the insured might be given the choice of paying premiums from the first unpaid to the date of reinstatement or alternatively, the level premium might be adjusted upwards slightly.

Several insurers were asked what their company policy was in regards to the collection of premium arrears on reinstated policies. Their responses are transposed into the above example.

Insurer 1: Premiums are collected from the date of lapse to the next paid-to date, ie, February to June inclusive.

Insurer 2: Premiums are collected for the three months preceding reinstatement, ie, March to June inclusive.

Insurer 3: All premium arrears are collected, ie, January to June inclusive.

Insurer 4: Sufficient to pay the next premium due, ie, June.

Insurer 5: Two months premiums are collected, being the unpaid premium that caused the lapse and the next premium due, ie, January and June.

Insurer 6: “We tackle this a bit on a case by case basis depending on the adviser, how long the policy was in force, etc.”

Winner of the “Logic Award” is Insurer 5, with Insurer 6 applying least logic to its policy.

Again, consider the adviser and the client. Realising a lapse has occurred, the adviser contacts the client and arranges for the reinstatement form to be completed. The client then asks,  “What arrears do I need to pay?”.

Once more, the safety conscious adviser would be tempted to respond: “Well it is hard to say. Let me have someone call the insurer and see what their policy is in regards to this”. This results in further loss of credibility.

Summary

The credibility of the financial services industry takes a hit every time there is a dispute between the insurer and the insured.

One of the surest ways of guaranteeing a dispute is to have inconsistencies that lead to a lack of clarity and surety as to the position of the affected parties. 

There may or may not be merit in having consistency in trauma insured event definitions, but the difficulty of getting agreement between all insurers in regards to these complex definitions is possibly the reason the exercise has not yet been tackled. 

It would, however, be difficult to imagine two more fundamentally important areas of risk insurance protection than the ability to maintain insurance in force and to reinstate it if it lapses. 

The relative ease of obtaining a consensus in these areas might possibly encourage insurers to get some practice here and move onto more complex issues later.

Having said that, there are in fact other areas between lapsing and reinstatement, and trauma insured events definitions that need attention. 

Col Fullagar is the national manager, risk insurance at RI Advice Group.