The Financial Conduct Authority (FCA) has raised serious concerns about several elements of how insurers are addressing terminal illness benefits attached to life insurance policies.
The regulator strongly criticised insurers for the speed of claims where times were typically between two and three months, warning that customers’ remaining time should not be “marred by having to wait or chase for a claims decision”.
It highlighted that insurers should not assume a 12-month prognosis period for accepting terminal illness claims was appropriate without evidence that it was fit for purpose.
And the FCA told insurers to review whether excluding terminal illness claims at the end of policies was compatible with good outcomes under the Consumer Duty.
It’s review of terminal illness benefits also found poor customer communication had increased distress for customers or led them to question their treatment.
And it revealed some insurers were using their own chief medical officer or internal medical experts to decide claims when this may not be permitted by policy wording, with the FCA saying affected insurers may need to review how this had affected previous customers.
Advisers have also told Health & Protection how they believe terminal illness benefits are at times delivering poor outcomes and consumer harm.
‘Opportunities to improve customer outcomes’
Overall the FCA said the terminal illness feature was “a valuable addition to life insurance policies for customers” and that findings from its review did not suggest firms were routinely delivering poor customer outcomes.
“In assessing insurers’ own claims statistics, aggregated industry and validated in discussions with industry stakeholders and groups, we did not see evidence of significant numbers of declined terminal illness claims,” it said.
“In addition, reported terminal illness claims acceptance rates appear to be within the range of other life industry products.
“However, we see opportunities for life insurers to deliver improved customer outcomes for what is an inherently vulnerable group of customers.”
It conducted the review having been alerted to individual cases where terminally ill individuals experienced outcomes they considered unfair.
Explaining why the review was important, it noted that customers “seeking to make a terminal illness claim on their life insurance policies are likely to be extremely vulnerable and engaging with an insurance company during this time will be an additional and unwelcome stress”.
“There is also risk of significant consumer harm if insurers do not get their handling of claims right or offer the right customer support,” it added.
From the review it underlined six key areas which needed to be addressed by insurers.
Requirement for 12-month prognosis of death given by a medical practitioner
The FCA found it was not clear the claims process would be easier for doctors or provide better customer outcomes if a different time frame was used and that if it was extended to a longer period or more illnesses, premiums would likely be increased.
It added that while additional cover may benefit some customers, it believed firms should be able to set their own policy terms by considering costs and cover offered.
However, in highlighting good practice, it said firms proactively conduct a review of their policy wording and sales processes to assess whether the 12-month prognosis period is the most appropriate, taking account of reasonable customer expectations, and is in line with the products and services outcomes expected under the Consumer Duty.
It added: “Although terminal illness benefits have been common within life insurance products for many years, firms should not assume without evidence that the 12-month prognosis is fit for purpose and meets the needs of their target market at the point of delivery.”
Quality of claims process
The overall number of claims being declined and nature of disputes does not indicate widespread customer harm and the FCA did not find insurers made routinely poor claims decisions.
“However, we were made aware of individual instances of customers being unreasonably declined,” it said.
“Where this happens the impact on these vulnerable customers can be significant and they are less likely to be able to achieve peace of mind that their loved ones will be catered for.
“Additionally, given their inherent vulnerability, customers with a terminal illness may find it difficult to dispute a claim decision.”
It did note that customers were able to claim again if a claim was rejected and that while insurers’ claims activity data was available there was little information around the pre-claims experience.
In response, the regulator said it expected firms to ensure robust quality checking is in place, assessing a range of management information of claims.
“Importantly, this should include initial pre-claim enquiries to understand and evidence the fairness of end-to-end journeys for all potentially terminally ill customers,” it added.
Claim handling timeliness
The FCA strongly criticised the speed of claims handling by insurers, having found wide variation in insurers’ average time to handle claims ranging from about two months at one insurer to more than three months at others.
It emphasised that customers with under 12 months to live were unlikely to experience good outcomes from their insurance where there was a protracted claims process.
As a result it said: “We believe all insurers could make improvements to speed up claim decisions and make other improvements to better accommodate this vulnerable customer group.
“Insurers that took a more proactive approach to obtaining medical evidence were generally able to show improved speed of decision-making.”
The FCA continued: “Slow and delayed claims handling is likely to have a significant impact on terminally ill customers with a 12-month prognosis.
“Those who have bought an insurance policy that provides a lump sum in the event of such a diagnosis should not have their remaining time marred by having to wait or chase for a claims decision.
“We expect these vulnerable customers to be supported appropriately and promptly so they are better enabled to pursue their financial goals in line with their life insurance policy and put their affairs in order.”
It also expected firms to consider whether their terminal illness claims and pre-claims handling processes were sufficiently proactive, timely and flexible to meet the standards required by the consumer support outcome of the Consumer Duty.
Removal of the terminal illness benefit towards the end of the policy term
The FCA told insurers to review the suitability of policy terms which prohibit terminal illness claims in the last 12 months, or any other similar period, of the policy.
“Such terms can give rise to a potential foreseeable harm for instance where a customer may have a qualifying terminal illness but cannot access the benefit,” it said.
“Insurers retaining such terms should have a clear basis for how these are consistent with the delivery of good outcomes under the Consumer Duty, including experience-based evidence as to the extent of potential harm to customers.”
The regulator said it understood why insurers had policy terms which exclude terminal illness claims towards the end but cited good practice where firms were exercising judgement in applying these clauses, improving their ability to show good customer outcomes, or avoid poor outcomes.
Use of internal medical experts
The FCA raised concerns about how insurers informed vulnerable customers of decisions and found examples of poor customer communication from insurers when giving their views on the medical information from both treating and their own consultants.
“This led to increased distress for customers or gave them increased uncertainty about their condition or the treatment they were receiving,” it said.
The regulator said it expected insurers to be clear how they had taken into account medical evidence from the treating practitioner, including how well the practitioner knows the patient’s medical circumstances, when making triage, deferral or claim decisions.
It also raised concerns about communicating claims decisions where there is a conflict between the views of the treating consultant and the insurer’s chief medical officer (CMO), and said there should be clarity for customers about the independence and standing of the CMO and any other experts used.
“Communications, whether verbal or written, must take account of the vulnerability of terminally ill customers and their individual circumstances,” the FCA said.
“Although difficult claim decisions sometimes must be taken, firms must take steps to prevent communications contributing to any uncertainty a customer feels about their condition or the medical treatment they receive.”
Potential conflict between claims process and policy wording
The FCA also warned that it believed the policy wording used by some firms did not reflect the actual claims process undertaken when determining if the illness was terminal and met the required prognosis.
It found some insurers used their CMO or internal medical experts to decide claims when their policy wordings only referred to treating consultants. This could affect past customers as well as current ones.
“Insurers with terminal illness policy wordings that state it will make a claim decision based on the opinion of a treating consultant only should consider whether their actual claim process reflects the policy wording,” the FCA said.
“Where firms believe a change should be made their claims process, they should also consider the impact on existing and previous policies and customers.”
Consider ‘more felxible approach’
Concluding, the FCA said it was engaging with the individual insurers involved in this study.
“Where our work highlights some firms or practices as outliers compared to peers, or falls short of our requirements, we will be expecting them to take immediate action to resolve such issues and improve outcomes for consumers,” it said.
“In addition, we recognise some life insurers may, over time, consider how alternative approaches to the current terminal illness benefit wording may offer different benefits for customers, or improve customer outcomes.
“This may include a more flexible approach to the benefits available under life insurance policies. For example, covering named severe conditions, such as Stage 4 cancer, which may not meet the current terminal illness policy criteria.”