When clients are paid less than they expect, they tend to be as unforgiving as the sands of the Serbonian bog on those unwittingly caught in them – advisers – writes Col Fullagar.
Even in 1667 when John Milton was writing Paradise Lost, Serbis – a lake between Mount Cassius and Damiata in Egypt – was hardly a sought-after get-away destination.
It was surrounded on all sides by hills of loose sand which was carried into the water by high winds and so thickened the lake as to make it almost indistinguishable from the land.
Once caught in this sandy bog, the fate of the unsuspecting was sealed.
Milton described it succinctly in Book II, lines 592-594:
“A gulf profound as that Serbonian bog
Twixt Damiata and Mount Cassius old
Where armies whole have sunk.”
Today’s risk insurance professional encounters many Serbonian bog lookalikes:
- The shifting sands of trauma insurance definitions;
- The grainy challenge of compliant advice; and
- The unscaleable dunes of product differentiation,
But as sticky and treacherous as these can be, their one advantage is they are known hazards, allowing for precautions to be taken.
The peril of a true Serbonian bog is that its very existence is largely unknown and unsuspected, until it is too late.
Here is a case study, based on a true story.
Jerry accepted the advice of his financial adviser and put in place $1 million of TPD cover.
Several years later, Jerry was involved in a fall which left him with a permanent spinal impairment; he was forced to take medical retirement.
Jerry’s adviser reminded him he had TPD protection which, as a result of indexation, had increased to $1.25 million. The adviser stepped in and accepted responsibility for lodging and managing the claim.
The insurer called for various claim requirements but while the assessment process was continuing, Jerry’s policy benefited from a further indexation increase of $62,500, taking the total cover to $1,312,500.
Eventually, the “good” news was received; the claim had been admitted and funds would be direct credited to Jerry’s nominated account.
Wow, $1,312,500 – this would make an amazing difference to Jerry’s quality of life.
Two days later, however, elation turned to confusion and eventually anger. Instead of $1,312,500 being credited to Jerry’s account, the credit was for $1,250,000, the pre-indexation cover amount.
Questions to the insurer by the bemused adviser brought the response that Jerry had been deemed to be TPD at the date he ceased work and thus the benefit payable was the amount at that date – ie, pre-indexation.
However, the insurer happily announced, premiums paid since then would be refunded.
The fact that the cover to premium ratio was about 20 to 1 was not lost on Jerry, resulting in his cynicism towards the insurer and his loss of confidence in the adviser who not only did not pre-warn him of this technicality but apparently was not even aware of it.
Jerry and his adviser had unwittingly been caught in the Serbonian bog of time and its potential impact on the benefit amount payable at the time of claim.
The “gulf profound as that Serbonian bog” was an understanding disconnect between what the insurer intended when it drafted the policy and what the adviser and client understood or failed to recognise when they read the policy.
Jerry believed he satisfied the definition of TPD when the insurer made its assessment decision and thus the claim amount should have been the insured benefit at that time: ie, $1,312,500.
The insurer, however, believed otherwise and, citing various technical nuances within the policy, was only prepared to pay $1,250,000 plus a refund of premiums paid since the policy anniversary date.
The adviser was caught in the middle and ended up losing Jerry as a client.
All parties had become bogged down by what will be termed, the effective date of benefit payment: ie, the date designated in the policy or by virtue of the insured event definition as being the date at which the amount payable is calculated.
Time – friend and foe
Today’s multi-faceted and comprehensive risk insurance contracts are loaded with many twists and turns. Some are time-neutral but others are highly time sensitive, with time being both a friend and a foe.
The astute financial adviser is aware of when time is of consequence and the extent of its significance because quite simply it, in part, dictates the amount paid in the event of a claim – and this amount can increase and decrease under the influence of policy terms and conditions much like deposits of sand under the influence of coastal winds and tides.
Benefit amount increases
A number of features within the policy can lead to the benefit amount increasing over time.
The most common and obvious example is the annual CPI-linked indexation increase that usually occurs on the policy anniversary.
Even for benefit amounts as little as $200,000, a 5 per cent indexation increase means an additional $10,000 payable in the event of a claim.
A less appreciated basis of benefit amount increase is the lapsing of time-based exclusions: for example, the 90-day trauma exclusion.
If an excluded insured event occurs within this period no benefit is payable, but a day after its expiry the amount payable can increase to the full insured benefit.
More subtle examples include guaranteed insurability options which may have a restriction for TPD caused by sickness in the first six months following the taking up of an option. Once the six months expires, full cover ensues.
Benefit amount decreases
There are also contractual occasions when the benefit amount payable in the event of a claim can actually or effectively decrease as a result of the passing of time.
The premium freeze may have been activated resulting in the insured benefit amount decreasing each year as the insured’s age increases.
With some policies, cover may automatically decrease when an insured reaches a predetermined age – for example, TPD cover after age 60 may reduce by 20 per cent each year through to zero at age 65.
Benefit increase entitlements will often have an expiry date – for example, a buy-back facility under a trauma insurance policy. If this facility expires it effectively decreases the amount that might have been payable if insurance was repurchased.
And, of course, the consummate reduction is wrought by the effects of the policy end date when all benefit entitlements cease.
Benefit amount remains unchanged
There are also policy terms and conditions for which time does not impact the benefit amount payable but it alters the definition to be satisfied.
A well-known example is that of TPD for which, after a set age, eg, 65, the definition may alter from one that is occupationally-based to a more restrictive definition that is based on an insured’s ability to perform a set number of the Activities of Daily Living.
A more subtle example could be for an insured covered under a child’s trauma policy which converts to standard trauma insurance at a predetermined age. Upon conversion, cover may be extended to include the additional adult-insured events.
In summary, any time a policy term or condition related directly or indirectly to a benefit payment mentions a “by” or “after” date, there is the potential for the benefit amount payable in the event of a claim or the basis of payment to change.
Avoiding the Serbonian bog
For Jerry the fundamental issue was the effective date of benefit payment: ie, the date designated in the policy or by virtue of the insured event definition as being the date at which the amount payable is calculated.
Now one alternative for Jerry, his financial adviser and others in a similar position is to dispute the matter with the insurer, but this can be about as effective and equal a contest as struggling against the real life Serbonian bog.
It is far better to avoid the problem and the contest.
Avoidance could have been achieved if Jerry’s adviser had been aware of the effective date of the benefit payment so that the amount payable could have been made known to Jerry, ahead of him forming his own expectation.
Awareness can be achieved in one of two ways.
The easiest way is for the construction of a signpost – Beware Serbonian Bog Ahead.
The risk insurance equivalent is to provide, within the policy document, a clear definition or explanation of the effective date of benefit payment, for example:
“The benefit amount payable is calculated at the date we admit a claim.”
Thus, for benefit amounts that increase over time, this would likely be a plus; however, for benefits that decrease, this might be less of a plus.
The one advantage of course is that, plus or minus, all parties will potentially know where they stand such that preparations can be made and nasty surprises avoided.
Unfortunately, on the retail risk side, the sign-posting facility appears to be largely lacking.
When the effective date of benefit payment is not defined or identified within the policy, it is necessary to study the definition of the insured event in order to assess the position.
Event-driven insured events
Many insured events are fully event-driven and the event effectively occurs at an identifiable point in time.
- An acute health event such as a heart attack, stroke and of course, death;
- A medical event such as the undergoing of open heart surgery;
- A diagnostic event such as the diagnosis of multiple sclerosis; or
- An acute loss such as the loss of two legs, two arms, an arm and a leg, etc. where loss is “loss by severance.”
In the above situations, if payment is contingent on the occurrence of the event, the effective date of benefit payment and thus the amount payable would logically be the benefit amount in force at the time of the event.
Event and/or severity-driven insured events
Some insured events contain an event and/or a severity component.
An example of an event AND severity definition would be:
“The unequivocal diagnosis of Motor Neurone Disease (the event) where the condition leads to a Whole Person Impairment of at least 25 per cent (the severity).”
The effective date of the benefit payment should be the latter of the date of “unequivocal diagnosis” and the date it could be reasonably established “on the balance of probabilities” the insured was suffering at least a 25 per cent Whole Person Impairment.
An example of an event OR severity definition might be “the loss of two legs, two arms, an arm and a leg, etc.” where loss is “loss of the use of”.
If “loss of the use of” was caused by a debilitating disease rather than severance, the severity requirement would be assessed in a similar way to that in the Motor Neurone Disease definition above.
The date that the severity component is deemed to be satisfied, however, may be prior to the insurer’s assessment of the claim: ie, the effective date of benefit payment could be back-dated.
Event, severity and time-driven insured events
Some insured events contain an event, severity and time component, for example:
“Motor Neurone Disease means the unequivocal diagnosis of Motor Neurone Disease (the event) where the condition leads to a Whole Person Impairment of at least 25 per cent (the severity) and the insured being absent from all work for at least six months (the time).”
Another would be a TPD definition:
“The insured, by virtue of sickness or injury (the event), has been absent from work for at least three months (the time) and then is permanently unable to perform their own occupation (the severity).”
With these definitions, the effective date of benefit payment should be the date the last of the three components is satisfied.
The last style of definition includes the requirement for the insurer to form an “opinion” or, as it is better known, an “assessment.”
Thus, the above TPD definition would be prefixed by “In (the insurer’s) opinion ...”
Generally, the insurer’s assessment would be the last component of the definition to be satisfied and, thus the benefit amount payable should be that in force when the assessment is made.
It is possible, however, that the assessment might be made ahead of the requisite absence from work: ie, the insurer is willing to make payment in advance.
The insured may be better served, however, to wait if an indexation increase was due prior to the expiry of the waiting period.
A further twist could be a TPD definition for which, by virtue of the Guarantee of Upgrade, the waiting period reduced from six to three months.
The informed adviser may suggest utilising the longer waiting period in order to enable an indexation increase to take effect and be paid.
The insurer, on the other hand, might look less than favourably on a claim it felt had been deliberatively delayed for an extended period of time in order to take advantage of multiple indexation increases prior to a claim being advised.
And finally, the forward-thinking adviser might suggest an insured who will shortly turn 64 lodges a trauma claim ahead of time in order to have an assessment and payment made at the earliest possible date, thus enabling the buy-back facility to fall due prior to the policy expiry at age 65.
By knowing the effective date at which a benefit amount is payable, an adviser can ensure optimal and known benefits will be paid at the time of claim.
This can be the difference between:
- A big adviser tick resulting from the expected benefit payment being made in a timely manner; and
- Total frustration and a sense of being yet another powerless victim of “insurance rip-off merchants” when less than the expected benefit payment is made, notwithstanding it may have also been made in a timely manner.
Clients might be forgiving of delays, but when they are paid less than they expect they tend to be as unforgiving as the sands of the Serbonian bog on those who are unwittingly caught in them.
Col Fullagar is the principal of Integrity Solutions.