Insurance Companies issue the policies primarily to cover the risk and provide financial freedom to the policyholders. Insurers are settling the claims even if the life insured died on the next day of taking life insurance policy, but subject to verification of the declaration and other reports if any, given by life insured in the proposal form in the areas of health history, family history and insurance history etc.
Why do insurers verify the declaration and do investigation at the time of death claim, especially with early claims? It is because they want to rule out any suspicious claims and to protect the policy holders from such suspicious claims.
Sec 45 of insurance act (before enactment of new insurance bill 2015) says that “No policy of life insurance after the expiry of two years from the date on which it was effected be called in question by an insurer on the ground that statement made in the proposal or in any report of a medical officer, or referee, or friend of the insured, or in any other document leading to the issue of the policy, was inaccurate or false, unless the insurer shows that such statement was on a material matter or suppressed facts which it was material to disclose and that it was fraudulently made by the policy-holder and that the policy-holder knew at the time of making it that the statement was false or that it suppressed facts which it was material to disclose”.
The above statement says that insurer has to prove that the claim is fraudulent if it is rejecting after 2 years from the date of issuance of the policy, but there is no need of proving it if the claim happens before 2 years of issuance of the policy. This shows that insurers have a way to protect the policyholders’ money from fraudulent claims at any point of time (by proving).
Now, the current insurance bill 2015 says that “no claim can be repudiated/rejected by insurer under any circumstances if the death happen after 3 years of issuance of policy”.
This will have a great impact on insurers. What are these impacts and its mitigations on them. The impacts are:
- No. of claims may increase 3 years from now since there might be high probability of not disclosing the existing diseases in the proposal form by life insured
- Insurers may have to spend more money towards claims which leads to high claim ratio, thereby leading to increase in premiums.
We hear about many frauds happening in life, health and general insurance industries. This new provision may lead to a greater extent, an increase in hiding the truth in the application form to escape from rejection of the proposal or to avoid extra premium for the extra risk or to go for fraud claim mitigation.
What is the way out for insurers? 1. Strengthen the underwriting process 2. Agents confidential reports should show the real picture of the life to be insured in the areas of health, financial status etc since agent is the person who meets customer many times for issuance of the policy and it is his/her responsibility to provide correct report. Agent is considered to be primary underwriter.
But one thing insurers need to look into is to issue the policy and complete the investigation to rule out any fraudulent intent, within 3 years from the date of issuance of policy for high sum at risk policies to start with. There might be thousands of such policies for which investigation to be completed before 3 years.If in the course of investigation, it is found that some facts are not mentioned by the life to be proposed, the insurer can reject the policy upfront and may return the premiums paid already after deducting expenses including risk charges till that point of time. The investigation requires visiting various hospitals, employers and other agencies to get the documentation to prove that the life to be assured misled the insurer by not mentioning the health, financial and other related facts that impacts the decision of the insurance company while issuing the policy. This leads to huge expenses to be incurred by the insurer in doing huge number of investigations to weed out fraud cases and reject them. This cost ultimately may be passed on to policyholders in the form of higher premiums or reduced bonuses etc.
Written by P Vasudevudu Compliance Officer – CAMS Insurance Repository Services Ltd.
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