Col Fullagar
With emotions ranging from disappointment to frustration, I read the opinion in MoneyManagement (February 1, 2007) under the heading “The Matter of Trust”.
Jumping on the bandwagon of concern about the underinsurance problem, the writer proclaims, “One of the ways to encourage more Australians to take out income protection insurance is to have a trusted industry … One of the ways for customer trust to be broken is to fail to meet a customer’s expectation when they most need insurance — at claim time”.
If insurers want to meet a customer’s expectations at claim time, perhaps they should follow the lead of Asteron and have the courage to undertake an independent, robust, external analysis (C-Map) of their claims department.
The article continues: “Income protection insurance has one objective for clients, to protect and maintain their lifestyle by helping to replace earnings if they become disabled”.
While essentially correct, we must go further.
Policies should be fair and equitable to both clients and insurers, so our industry can remain financially strong and advisers can recommend policies confident the reasonable expectations of their clients can be met well into the future.
If, for example, policies provide compensation in excess of the loss sustained, anti-selection is the inevitable outcome.
Many advisers recall the 1990s, when contracts went ‘too far’ and claims chaos led to price rises that put insurance out of the reach of many clients.
The impact continues and is one of the reasons for underinsurance in Australia.
The article, however, ignores this and links underinsurance to the so-called ‘capability clauses’ that “… enable claim assessors to force a reduction in benefit entitlements for disabled claimants at the discretion of the insurer”.
Research house XPlan has recently released a document explaining its rationale behind downgrading insurers that use claims reduction clauses. Overall, it concluded: “There can be little doubt that ‘capability clauses’ are to the detriment of the policyholder.” The reality of these clauses is that there is no upside for the customer — they are simply a lever that insurance companies can pull to reduce claims payments.
The link between ‘capability clauses’ and underinsurance is tenuous and it would seem that the writer’s motivation is something other than a selfless concern for the underinsured.
Having said that, what is the position regarding ‘capability clauses’?
Capability clauses
These clauses were introduced in the early 1990s when total disability definitions were generally based on the inability to perform all the important duties of an insured’s own occupation.
Partial disability definitions required the insured to be “working in their own or another occupation …”.
While there was a clear distinction between the definitions, there was a gap if an insured was partially disabled but work was not available or they chose not to work; they did not satisfy the requirement to be ‘working’ and, thus, were not contractually eligible for a benefit payment.
Wording was added that enabled a partial benefit to be paid if the insured was “working or capable of working”.
There were no actual earnings, so it was necessary for the insurer, acting “reasonably and in good faith”, to estimate earnings “in line with medical and other available evidence”.
‘Capability clauses’ provided an equitable outcome for both insurers and the insured.
This changed when total disability definitions became based on the inability to perform one important duty, as this created an overlap rather than a distinction between the two definitions.
If an insured could perform some of their important duties, but not all, and did not work, it was believed they would be contractually totally disabled, irrespective of whether part-time work was unavailable, part-time work was available but they were unsuccessful applying for it, or part-time work was available but they were too lazy to work.
The only person to be treated differently was the equally disabled insured who undertook part-time work. They received a lower payment by virtue of a partial rather than a total disability benefit.
Capability clauses should have become redundant.
However, simply removing them does not resolve the problems that currently exist for the adviser, the client and the claims assessor as revealed, in part, by an extract of legal opinion that considers the MLC disability definition.
“… if Mr X is unable to work full-time as a direct result of his injury or sickness, he could argue with some force that he still meets the definition of total disability, even though he is physically or mentally able to perform all of the facets of his occupation for a limited time. He is ‘in a practical sense’ unable to work, and this is because of his injury or sickness. The duties of his occupation include the obligation to work full-time.
“The fact that his former employer will not provide him with part-time employment would be some evidence of the fact that in order to do the important duties of his occupation, X must be able to work full-time.
“On the other hand, in a case where there is no legal or moral obligation to be able to perform a task for any particular period, if the insured is able to perform that task at all, he will be able to ‘do at least one of the important duties of their regular occupation’ and would not qualify for a total disability benefit. This might be the case, for example, if the previous employer gave evidence that it employs people to do similar jobs to X’s on a part-time basis, but was not prepared, for whatever reason, to employ X, either full-time or part-time.”
This means an adviser may have to consider whether a client’s occupation lends itself to part-time work and also the likelihood that the employer would make part-time work available.
This means a claims assessor may have to consider whether or not the insured’s inability to work is caused by medical factors or occupational factors.
Hardly an outcome that will inspire trust in the industry or ensure the client’s expectations at the time a claim is met.
And to complicate matters further, the contractual position will no doubt vary between insurers.
Conclusion
This situation needs to be resolved. However, a resolution will not be achieved by risk researchers rating ‘capability clauses’ or by employees of insurance companies glossing over the issues.
A resolution will only be achieved when product designers stop chasing risk research brownie-points and start providing clear and unambiguous contracts designed around equity and sustainability that compensate the client for the loss suffered as a direct result of the insured event that has occurred.
A resolution will only be achieved when risk researchers act responsibly and rate policies on a basis that recognises the needs of all policyholders, not just those who are on claim.
Maybe then advisers can be confident the policies they recommend will protect the real needs of clients at a price more people can afford.
Maybe then we can start to address the underinsurance problem and in the process improve the perception of our industry.
Col Fullagar is a risk manager at Genesys Wealth Advisers .
