Public Consultation on Private Members' Bill - Consumer Insurance Contracts Bill 2017 Irish Life Group Submission May 2019

Public Consultation on Private Members’ Bill – Consumer
Insurance Contracts Bill 2017
Irish Life Group Submission
May 2019
                               1

INTRODUCTION

ABOUT IRISH LIFE

Irish Life empowers its customers to look to the future with more confidence and certainty. We manage
the financial needs of more than 1.3 million Irish customers. We think ahead to find opportunities and
anticipate challenges to help deliver more security and certainty for their futures. We have 80 years’
experience serving corporate and private customers in Ireland. So we pride ourselves on having a deep
understanding of our customers’ needs, interests and concerns for themselves and their families.

Irish Life Group (ILG) includes Irish Life Assurance, Irish Life Health, and Irish Progressive Services
International (IPSI) as well as its associated companies Irish Life Investment Managers Setanta Asset
Management, Cornmarket and Invesco. We currently have 2,400 people working at our campuses in
Dublin and Dundalk, and we continue to grow.

EXECUTIVE SUMMARY

The Irish Life Vision is ‘helping people build better futures’ and we are in favour of balanced measures
that seek to improve consumer protections within insurance contracts. However, there are a number of
existing national and European legislative provisions and Codes which confer consumer rights and
protections to insurance customers. Irish Life has a concern that a number of the provisions set out within
the proposed Bill would duplicate existing provisions and will needlessly increase compliance costs to
implement a parallel regulatory regime to that already in place.

Where there are already existing provisions within legislation these should not be duplicated within the
provisions of the Bill. There is no consumer benefit to the duplication of existing regulation and a real
danger where legislation is similar but not identical of increasing compliance and regulatory costs without
a corresponding benefit. Irish Life would therefore endorse the position vis-à-vis the duplication of
regulation as set out within the Central Bank’s submission to the Finance Committee on the Consumer
Insurance Contracts Bill1.

While the Bill includes both life and non-life insurance contracts within its scope, there is a fundamental
differentiation between the differing product types that cannot be ignored when assessing the Bill. Life
insurance contracts are long term contracts compared to annual contracts within the non-life market and
this means a differing approach and interaction with consumers.

In addition, Irish Life has a key concern on the use of the terminology of “fraudulent misrepresentation”
within the Bill itself rather than the term “deliberate misrepresentation” as used in the UK. The use of the
word “fraud” has criminal connotations and may imply a shift to a criminal burden of proof for insurers i.e.
beyond a reasonable doubt rather than just on the balance of probabilities. This could have a severe and
disproportionate effect on the costs of claims handling for insurance undertakings, on the costs of cover
for our consumers and go beyond the stated intention of the Bill.

1   https://www.centralbank.ie/publication/correspondence/oireachtas-correspondence
                                                        2

SUBMISSION

I. The specific costs of implementing the measures proposed by the Bill

A number of the provisions set out within the legislation duplicate existing requirements and/or are very
similar to requirements with which Irish Life is already required to comply. If the duplicate or similar
requirements as highlighted by the Central Bank are not removed from the Bill this could involve an
increase in regulatory and compliance costs and a necessity to change existing policy documentation.
Similar but not identical language also has the potential to lead to differing interpretations between two
texts and cause both regulatory and consumer confusion which again would increase costs. It is difficult
to quantify the extent of this cost increase and the additional training for staff on the changes,
documentation changes required and cost of handling that may be involved.

Life assurance contracts are long-term by nature often running for 20-30 years or more. Underwriting
questions will have been based on the standards of the time and an understanding that the principle of
“uberrima fides” would apply to customers. The technical provisions held by firms reflect the view that
customers were expected to honestly answer the questions posed at the time even if the questions asked
today may be either more detailed or presented in more simple language. With Irish Life paying almost
€300m in protection claims to customers and their dependents each year, a relatively small increase in
our claims rate as a result of these provisions applying retrospectively would lead to multi-million euro
additional costs. As the majority of existing protection contracts have guaranteed premiums, these
additional costs are likely to have an indirect impact on customer premiums on new policies.

A key area of concern which could lead to significant costs increases are the provisions around non-
disclosure and in particular the use of the phrase “fraudulent mis-representation”. Irish Life notes that one
of the objectives of the Bill outlined in correspondence by the Central Bank letter of 5th September 20182
is: “…….in circumstances (outside of fraud) where facts not disclosed by the policyholder are relevant to
the claim, rather than an outright and total refusal in all cases, the insurer’s right to refuse the claim would
be explicitly subject to a compensatory and proportionate test, reflecting what the insurer would have
done had it been aware of the full facts”

"Non-disclosure" refers to the situation where a customer fails to reveal a relevant or material fact when
applying for – or renewing – an insurance contract. Irish Life considers a "material" fact to be one which
would have influenced the underwriting of the policy. For example a fact that would have prevented us
from accepting the customer on standard terms or in the extreme case something which would have
resulted in Irish Life declining to cover the individual.

Irish Life follows best industry practice when underwriting risks and assessing claims. Clear questions are
included on proposal forms on the facts that are considered material to the provision of cover under the
policy. This assists in underwriting and helps avoid declining claims at a later date.

To be clear, in cases where Irish Life believes non-disclosure is innocent a contract will not be voided
and a claim will be paid in full.

In cases where Irish Life believes non-disclosure is careless or negligent and would have resulted in a
different underwriting outcome Irish Life seeks to put both parties in the position they would have been in
had full disclosure been made. This may result in either a proportionate settlement for a reduced amount
or the policy being declared void. The outcome will depend on whether or not Irish Life would have
entered into the contract had full disclosure been made.

2   Ibid 1 above
                                                         3

Where Irish Life believes that the policyholder deliberately or recklessly misrepresented the facts and
such misrepresentation would have resulted in a different underwriting outcome Irish Life can refuse the
claim and void the policy.

Irish Life declines a very small number of claims on the grounds of non-disclosure - 1.5% of total claims in
2018 and only in cases where we believe that the policyholder deliberately or recklessly misrepresented
the facts or where the non-disclosed information would have precluded Irish Life from entering into the
contract.

Claims are declined by Irish Life only as a last resort, this is highlighted by the statistics on our claims
experience below:

       In 2018 Irish Life paid out €299 million combined to customers and their families affected by
        injury, illness, and death.

       During 2018 Irish Life paid out €119.6 million in individual life insurance to 1,805 families for
        people who died. This compares to 22 claims that were declined on the grounds of non-disclosure
        where the total benefit amount would have been c €3.0m. Declined claims represent 1.2% of the
        total individual death claims that were reported to Irish Life in 2018.

       Similarly in 2018, the Irish Life paid out €58.8 million to 897 people for individual Specified Illness
        Cover claims. Only 22 sickness claims were declined on the grounds of non-disclosure covering
        €1.5m of benefits and representing 2.2% of total sickness claims reported to Irish Life Retail.

       Overall 1.5% of individual claims reported to Irish Life in 2018 were declined claims on grounds of
        non-disclosure, this represents a minority of policyholders.

We require that our customers act in good faith and disclose all facts that are material to the risk for which
they are seeking cover. The drafting within the proposed Bill would appear to require insurers to prove
fraud before declining a claim. An allegation of fraud against a customer would not be made lightly. This
places the burden of proof on the insurer where we suspect that fraud may have taken place and it
reduces the responsibility of the customer to disclose all the facts. In these circumstances it makes it less
likely claims would be rejected on the grounds of deliberately or recklessly misrepresenting the facts.

The use of the term “fraudulent misrepresentation” would appear to apply a criminal test of mala fides that
goes beyond that which is required if the misrepresentation was merely deliberate. The Law Reform
Commission was clear within its Report that insurers need an adequate remedy to ensure that
policyholders provide honest and truthful answers when completing application forms. If there is no
deterrent or the deterrent is too costly for insurers then there is a moral hazard that less honest
policyholders could lie on forms to the detriment of all.

In the United Kingdom this issue was dealt with by the use of the term “deliberate” rather than “fraudulent”
which allowed insurers to void a claim once they could prove the misrepresentation was deliberate (or
reckless) in its nature on the balance of probabilities. It is unclear therefore why a higher burden of proof
is being set out within Irish legislation.

Ultimately this would be to the detriment of both customers and insurers. Admitting and paying claims
where material facts were omitted at outset but where fraud cannot be proven adds complexity to the
underwriting process. This makes it more difficult to decline claims for non-disclosure where the insurer
has been deliberately misled. This increases the risk for the insurer and this will in turn inevitably lead to
an increase in the cost of cover for families, including for basic mortgage protection cover – which is
required by law when taking on a home loan mortgage.
                                                         4

The requirement to process and report on these ‘frauds’ in itself could be a real problem. For example if
they have to be reported as ‘frauds’ to the Garda, this would delay claims decisions and could potentially
involve Gardai visiting ill people and next of kin - this is not what we want as an industry.

It is also not clear from the current drafting of the Bill where whether it is meant to draw a differentiation
between a “deliberate” and a “fraudulent” misrepresentation, it is the view of Irish Life however that there
should be no differentiation and that both should be treated in a similar manner and this should be
explicitly set out within the definition of “fraudulent misrepresentation”.     Negligent misrepresentation
should also be defined within the legislation and set within the objective standard of general tort law.

Irish Life would suggest that the definition of “fraudulent misrepresentation” be as follows:

“fraudulent misrepresentation” means a misrepresentation that is false or misleading in any material
respect and which the consumer either— (a) knows to be false or misleading, or (b) consciously
disregards whether it is false or misleading, and “fraudulent” or “fraud” shall be construed accordingly and
shall include any deliberate or reckless misrepresentation;

Section 7 (3) should also be amended and reference to “fraudulent misrepresentation” rather than
referencing deliberate and reckless misrepresentation.

In addition, the drafting under Section 7 (4)(a) when referencing “if any insurer could not have entered into
the insurance contract on any terms” sets the barrier towards underwriting too high, as with a premium
large enough effectively any risk can be insured. The term should therefore be redrafted to “if any
reasonable insurer could not have entered into the insurance contract”.

Section 7(5) of the Bill allows the insurer to avoid the contract of insurance “where an answer by the
consumer involves a fraudulent misrepresentation” or where “any conduct by the consumer involves
fraud”. However, it fails to mention whether the premiums can be retained by the insurer. This can be
contrasted with the UK Act which specifically provides that premiums can be retained in the case of a
deliberate or reckless misrepresentation.

The following text (adapted from section 2 of schedule 1 of the UK Act) could be incorporated into section
7(5) to clarify the point:

 “Where a claim is made under a contract of insurance and where an answer by the consumer involves a
 fraudulent misrepesentaion or where any conduct by the consumer involves fraud of any kind, the
 insurer —

 (a)may avoid the contract and refuse all claims, and

 (b)need not return any of the premiums paid, except to the extent (if any) that it would be unfair to the
 consumer to retain them.”

It is important to recognise that notwithstanding that the insurer may not be admitting a claim for a
particular cause of death, other risks have been run by the insurer that may not have crystallised. For
example, a death claim arising unambiguously from a car accident could well, had it occurred, have been
paid without any non-disclosure relating to a health matter being uncovered. This risk, notwithstanding
that it did not crystallise, cannot be carried at no charge.

Irish Life also notes that under Section 15 (6) an insurer cannot claim against a consumer the cost of
investigating a fraudulent claim regardless of whether this proves to be true or otherwise. Hence, an
insurer can incur significant costs and prove that a claim was fraudulent and there is no recourse to
recuperate these expenses be they investigative or legal e.g. the investigative costs involved where a
policyholder has staged an accident in order to claim on insurance. If the remedy is purely the voiding of
the policy there is no deterrent against persons who purposefully seek to defraud insurance companies.
                                                        5

At a time where claims costs are increasing this measure does not appear proportionate or balanced and
will only act to the detriment of honest policyholders who will have to may have to incur higher premiums
in order to fund the costs of fraudulent claims.

II. The specific benefits to be gained for consumers and businesses falling within the scope of the
Bill if the measures proposed by the Bill are implemented.

The measures will lead to greater clarity for consumers at new business stage and are broadly welcomed
for new contracts once appropriate time has been provided to complete any necessary reviews.

Whilst greater certainty would be provided to new investment customers, it would be at the cost of
exposing the insurer to risks from investors who aim to arbitrage investment markets. Insurers would
potentially be forced to hold consumers investment in cash until the end of the cooling off period in order
to avoid this risk. This could lead to consumer detriment as markets may be increasing at this time and
will have to wait until the cooling off period has elapsed.

III. A view on whether the benefits outweigh the costs – i.e. a cost benefit perspective on the
proposed legislation

The benefits are considered appropriate for new customers. However, it would seem inappropriate that
new policies would bear additional costs as a result of any retrospective changes to policies taken out
many years ago.

Provision 9 – Right to withdraw from contract of insurance by notice: cooling-off period.

For life assurance contracts, a 30 day cooling off period is already allowed for under both the Solvency II
and Distance Marketing regulations. Therefore, there is no change arising from the principle of this
provision. However, there is one important provision missing in relation to investment based single
premium insurance policies – the ability to deduct from the refund any losses incurred by the insurer as a
result of fluctuations in the financial markets during the period the contract was in force.

The financial instability this could potentially give rise to for insurers in the case of extreme market
movements (assuming money was invested from outset) would seem inappropriate in relation to the
consumer benefit gained. In addition, customers may loose investment income at times where the
market is increasing as insurers may not invest until the cooling off period has elapsed.

Conclusion

The Irish Life Vision is ‘helping people build better futures’ so we support measures that seek to enhance
consumer protections but these need to be balanced to ensure that they do not create a situation where a
small number of persons can use the protections to their advantage and ultimately to the detriment of all
policyholders. There exists within the regulatory sphere already a multitude of protections and recourses
that policyholders can avail of should they believe they have been treated unfairly.

However, insurers also need to have the facility to operate their business for the greater good of all
without incurring large costs where a policyholder has engaged in deliberate or reckless behaviours. It is
in the best interest of the entirety of the market that there is proper regulation that both protects
consumers but also gives insurers the mechanisms to control claims costs.

                                                       6