WORDS ON WEALTH
The recent case involving Momentum, the Ganas family and an enraged South African public - after Durban journalist Tanya Waterworth’s story, first carried in the Independent on Saturday, sparked an explosion in the media - highlights the chasm between the big life insurance companies and consumers.
To recap, Momentum Life rejected a R2.4 million life insurance claim for Nathan Ganas, who was shot dead while trying to protect his wife, Denise, during a hijacking in the driveway of their home last March. The claim was declined on the grounds that Ganas had not disclosed that he had raised blood sugar levels when he took the policy in 2014.
The Long-Term Insurance Ombudsman found that Momentum was within its rights to reject the claim. But the intense media pressure forced Momentum to do an about-turn. It not only agreed to pay the claim, but also to amend its life policies by guaranteeing to honour claims of up to R3m to the families of victims of a violent crime, irrespective of the policy holder’s medical history.
A reputation takes years to build, but can take mere seconds to destroy. Has Momentum done enough to redeem itself?
Life insurance companies are a vital part of the economy and pay out billions of rands in claims each year. Last year, according to the Association for Savings and Investment South Africa (Asisa), life companies paid 99.3% of all claims against fully-underwritten life policies. But let’s face it, the life industry’s reputation has always been questionable, what with mis-selling, high fees, opaque structures, and early-withdrawal penalties on its investment products. A high level of distrust on the part of consumers has been difficult to dispel.
In the last decade or so, the industry has gone a long way in improving its image and becoming more consumer-friendly. A major advancement was the introduction of the Treating Customers Fairly regulatory regime. This moved regulation away from being purely rule-based to being principle-based. In other words, the spirit of the law was deemed to take precedence over the letter of the law.
But this has created a dilemma for life insurance companies, whose products are governed by precisely-defined legal terms and conditions. As soon as exceptions are made in the name of fairness, you open the way for abuse. (In a future column I will further explore the concept of fairness as it pertains to financial services.)
An insurance contract is a two-way undertaking. The insurer requires the applicant to be honest about his or her health, among other things, so that it can properly assess the risk it is taking on. Without such contractual conditions, a person with cancer, given six months to live, could take out life cover for millions in the knowledge they would pay only a few thousand rands in premiums. That would be unfair to all the other policyholders, who would carry the burden of the payout.
So, non-disclosure is a real issue, and of the 0.7% of life claims that were rejected last year, half were rejected for this reason, says Asisa.
Note that an insurer may only dispute a claim on the grounds of non-disclosure if it finds that the non-disclosure was intentional - in other words, that the policyholder knew about a condition but failed to disclose it with the intention either of obtaining cover they would normally not have had access to or of paying a lower premium. But how many people would do that if they knew any claim was likely to be declined?
Would you carry on paying your premiums month after month if you knew there was a high chance that the insurance company would not pay out? I suggest that in many cases, non-disclosure has been the result of ignorance of the contract details and about what to disclose and what not to disclose, as well as, importantly, the consequences of that non-disclosure.
What really got the public mad in the Ganas case was the fact that the death was from an unrelated cause. Momentum could reject the claim because insurers use the information you provide to assess the overall risk of death, not just the risk of you dying from a disease you may be susceptible to.
That brings us to the underlying factor that, in my opinion, is behind the industry’s failure to win the public’s trust and the public’s failure to fully understand the nature of financial products: advice. The provision of adequate advice also resolves the fairness-versus-legal-nitty-gritty dilemma - if you ensure that a client fully understands the product and its legal terms and conditions, and you have no ulterior motive for selling the product, you can’t be accused of being unfair.
Would Nathan Ganas have bought the policy had the intermediary fully explained the terms and conditions, including the fact that by not disclosing a condition such as raised blood sugar levels he would seriously jeopardise the chances of a payout, even if he died from an unrelated cause? After all, he could have taken out accidental cover at a far lower premium.