Big data could also change the underwriting process, enabling insurers to take a much more predictive approach. As an example, Mr Wibberley points to an individual who says they went to a particular university. If this is cross-referenced with their Facebook page and they have no friends from that university, it could be an indication that they might not be entirely honest. This insight might then trigger further investigation.
It is also worth examining how exposed insurers would be to claims they would previously have declined.
The Institute and Faculty of Actuaries study shows the percentage of claims that are declined after five years drops off significantly. For example, in the first year 21 per cent are refused. In the second year this figure falls to 12 per cent, with the trend continuing until it reaches one per cent after five years.
These figures suggest a five-year non-contestability threshold would give insurers the ability to catch a significant proportion of claims where material information has not been disclosed.
Stick or twist?
Non-contestability periods are common in other markets around the world, with most opting for either a two or five-year period. But, while they have successfully built their protection business around these terms and conditions, introducing a non-contestability period into an established market is more difficult.
The dynamics at play mean there is no appetite for a single insurer to adopt this approach. “There is too much risk for an insurer to do this,” Mr Wibberley says.
“There is too high a risk of selection against them and, if the price was higher they would fall to the bottom of the aggregators’ tables. It would need to be introduced across the protection market to work.”
With the idea of a non-contestability period supported by a significant part of the market, the pros and cons of introducing this concept must be carefully weighed up.
BIG NUMBERS
97.3%
Percentage of protection claims paid in 2016 (Association of British Insurers)
36,814
Number of life insurance claims paid in 2016 (Association of British Insurers)
52%
Of consumers believe life insurers pay out less than 70 per cent of claims (Aegon)
7.1%
Increase in sales of life insurance in 2016 (Swiss Re, Term and Health Watch 2017)
83%
Of policyholders are unaware insurers publish claims statistics (Aegon)
