We reviewed insurance companies’ approaches to terminal illness benefits to make recommendations for improvement.
1. Background
Life insurance provides peace of mind, with many people buying it to ensure mortgages are paid off and dependents are taken care of in the event of the person taking out the insurance dying. Life insurance protection products, such as term assurance and whole of life assurance often contain, as standard, a terminal illness (TI) benefit. This allows for an early payout of a life protection policy where the insured person is diagnosed with a terminal illness and expected to die within 12 months, allowing people time to set their financial affairs in order. This lump sum payment, which typically comes with no restrictions, can provide invaluable support for those with terminal illnesses and their loved ones at an incredibly difficult time.
Terminal illness benefit is different from critical illness protection which can be purchased as a standalone product (ie not embedded in a life policy) and is risk-rated and priced in a different way. Critical illness products may also provide a lump sum payment but are designed to provide money to a critically ill customer (which may include those with a terminal illness) for a wider set of purposes such as living expenses and loss or reduction of income.
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.
With this in mind, we reviewed insurance companies’ practices in the provision of terminal illness benefits to see whether there are any recommendations for improvement. Our findings and recommendations are summarised below.
2. Who this applies to
This review focused on the practices of life insurers. However, the findings may also be relevant to any brokers or advisors who sell life insurance protection products.
3. Why we did this work
We have been made aware of individual cases where terminally ill individuals experienced outcomes they considered unfair. The potential issues raised included:
- The requirement for a terminally ill patient to have a 12-month prognosis of death from a medical practitioner.
- The quality of the claims process from the customer’s first contact. This includes whether firms reasonably support such vulnerable customers, the challenges of providing medical evidence and the speed of claim decisions.
- The removal of the terminal illness benefits towards the end of a term assurance policy term (most commonly in the final 12-24 months of the policy).
Alongside the implementation of the FCA’s Consumer Duty[1], we assessed whether insurers were acting to deliver good customer outcomes for this policy benefit.
4. Our approach
Our review was based on a survey of life insurers’ practices on terminal illness. We requested insurers provide claims and complaints statistics, and other policy and sales-based management information, as well as qualitative data on related claims processes. We used our routine engagement with life insurers to supplement this information. We also engaged with the Financial Ombudsman Service and the Association of British Insurer’s (ABI’s) data service.
We also took account of correspondence and conversations relating to the customer experience of terminal illness claims and used market data to better understand claims numbers.
We assessed the overall adequacy of commonly used policy wording relating to terminal illness. This included whether insurers should rely on policy wording which only allows benefits to be paid if the insured is given a prognosis of less than 12 months to live.
We also assessed whether there is evidence of customers being routinely unreasonably declined and whether the claim processes employed by firms lead to poor customer outcomes.
5. Our findings and expectations
We believe the terminal illness feature is a valuable addition to life insurance policies for customers.
The findings from our review do not suggest firms are routinely delivering poor customer outcomes for terminal illness benefits. In assessing insurers’ own claims statistics, aggregated industry data (sourced from the ABI Protection and Claims Paid statistics) and validated in discussions with industry stakeholders and groups, we did not see evidence of significant numbers of declined terminal illness claims. 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. Our key findings are:
Requirement for 12-month prognosis of death given by a medical practitioner
- It’s not clear the claims process would be easier for medical practitioners, or overall outcomes better for customers, if insurers implemented a different time frame for the prognosis (ie, if policies required a diagnosis that the insured was likely to die within 6 months or 24 months, rather than 12 months).
- If the 12-month period was extended (or covered all terminal illnesses), it’s possible insurers would increase premiums to reflect increased risk.
- While additional cover may ultimately benefit some customers, we believe firms should be able to set their own policy terms by taking into account policy costs and level of cover offered.
- We consider it reasonable for insurers to require medical evidence of the prognosis to prove a valid claim. Insurers’ reliance on such medical opinion is the only practical way to assess payment of the benefit.
Good practice
- 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.
- 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.
The quality of the claims process and management information
- The overall number of claims being declined and nature of disputes does not indicate widespread customer harm. We did not find that insurers made routinely poor claims decisions.
- However, we were made aware of individual instances of customers being unreasonably declined. 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.
- In considering this, it should be noted that a terminal illness claim decline is not a decline of any subsequent death claim on the underlying life policy. The intended recipients are still likely to receive their payout as intended when the customer passes away.
- While we found that insurers were able to report extensively on claims activity, management information relating to terminally ill customers’ pre-claims experience (ie, customers’ initial enquiries with the firm) was lacking.
Good practice
- Firms arrange training by a charity that can help front-line staff understand how best to serve terminally ill customers.
- We saw some evidence of enhanced quality checking processes and oversight which will aid good customer outcomes. This included all declined claims being independently checked, frequent reinsurer audits, management information in place to show all ‘notifications’ of a terminal illness as well as formal claim logs.
We expect
- To ensure good customer outcomes are achieved, firms should 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.
Claim handling timeliness
- We found wide variation in insurers’ average time to handle claims. Customers with under 12 months to live are unlikely to experience good outcomes from their insurance where there is a protracted claims process. Insurers’ average claim times can be long, ranging from about 2 months at one insurer to more than 3 months at others.
- 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.
Good practice
- Some firms proactively sought ways to engage with medical practitioners and improve their access to medical evidence, including paying medical practitioners up-front, in order to enable faster claims resolution.
We expect
- The Consumer Duty’s consumer support outcome requires firms to provide support that meets their customers’ needs. The support firms provide should enable consumers to realise the benefits of the products and services they buy. 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.
- We expect firms to consider whether their terminal illness claims and pre-claims handling processes are sufficiently proactive, timely and flexible to meet the standards required by the consumer support outcome.
Firms’ use of internal medical experts
- All insurers surveyed use the opinions of an internal medical expert (commonly referred to as Chief Medical Officer (CMO)) in claims decisions, which we do not find unreasonable in principle.
- However, we came across examples of poor customer communication from firms when giving their views on the medical information from both treating and internal consultants. This led to increased distress for customers or gave them increased uncertainty about their condition or the treatment they were receiving.
We expect
- We expect insurers to make clear how they have taken into account medical evidence from the treating practitioner, which includes taking into consideration how well the treating practitioner knows the patient's medical circumstances, when making triage, deferral or claim decisions.
- Where there is a conflict between the views of the treating consultant and the insurer’s internal medical expert (CMO), good customer support should include keeping the customer actively informed of the process and ensuring they clearly understand the basis for the ultimate claim decision.
- Customers should be provided with clarity as to the independence and professional standing of the internal medical expert (CMO) and any other specialist medical experts firms rely on, where they are part of the claim decision process. For instance, insurers should be able to provide customers with access to clear corporate policies into how medical experts are used.
- Communications, whether verbal or written, must take account of the vulnerability of terminally ill customers and their individual circumstances. 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 the actual claims process compared with that set out in policy wording
- We consider the policy wording used by some firms does not reflect the actual claims process undertaken when determining if the illness is terminal and meets the required prognosis. As noted above, all insurers surveyed used the opinions of internal medical experts in claim decision-making. However, while some insurers’ policy wordings specifically state that a decision will be based on evidence from a treating consultant and an internal medical expert, other insurers’ policy terms only refer to treating consultants.
- Insurers that refer only to treating consultants within policy wording may not have the contractual right to reject a claim if their internal medical expert (CMO) is of a different view to the treating consultant.
We expect
- 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. Where firms believe a change should be made their claims process, they should also consider the impact on existing and previous policies and customers.
- Firms should be clear and consistent in their policy documents and other communications to customers (either in policy documents or elsewhere) on how the claim decision is to be made and who will make it.
Removal of the terminal illness benefit towards the end of the policy term
- Some insurers’ policy wording states that it will not accept terminal illness claims towards the end of the policy term (typically in the last 12 months). We recognise that insurers are likely to have included such an exclusion so as not to pay claims which ordinarily would not be covered in the term of the life policy. However, such a policy term could lead to customers being declined (or not submitting) a terminal illness claim when severely ill and at a time when advance payment of a life insurance claim is likely to give significant peace of mind.
Good practice
- We saw evidence of firms exercising judgement in the application of such clauses, improving their ability to show good customer outcomes, or avoid poor outcomes.
We expect
- Insurers should review the suitability of policy terms which prohibit terminal illness claims in the last 12 months of the policy (or similar period). 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. 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.
6. Next steps and alternative firm approaches
All firms manufacturing or distributing life insurance protection products should consider these findings and take action to aid the delivery of good outcomes for customers who make, or potentially make terminal illness claims.
We are also 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.
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.
We would like to hear from firms that are considering alternative benefits under life insurance protection policies, by contacting your normal supervisory contact.