I am grateful for the opportunity to address the Chamber on this important issue, Mr. Fraser.
Although this debate is on the regulation of the insurance industry, my aim is not to discuss the subject in its broadest terms, but to focus on a specific issue as it affects one of my constituents. Paul McGaw’s health insurer refused to provide a payout under a critical illness scheme for a medical condition covered by the policy. I hope that bringing this issue to the Government’s attention will encourage them to reconsider the system of regulation of the insurance industry.
Mr. McGaw was an employee of Sopra Newell and Budge, an IT company based in Edinburgh. In June 2003, the company instituted a group critical illness scheme with AEGON UK, which was open to all employees. Mr. McGaw applied to join the scheme in June 2005 and his cover commenced on 1 July 2005. At the time of application, no comprehensive details of exclusions were made available to Mr. McGaw, nor was there a key facts summary. Applicants to the scheme were required only to complete a fairly basic tick-list questionnaire, which Mr. McGaw duly did.
Nearly two years after his policy cover started and following a number of medical tests, Mr. McGaw was diagnosed with multiple sclerosis by his general practitioner. That condition was covered by his policy. Understandably, he made a claim under the terms of the policy through his employer. The claim was examined by AEGON UK, which requested his previous medical records so that they could be looked at by its appointed medical adviser.
On 27 September 2007, Mr. McGaw was informed that his claim had been rejected on the grounds of paragraph 10.2 of the policy conditions:
“No benefit will be payable for any Critical Illness condition occurring within two years of the Member’s cover starting which, in the opinion of the medical advisor nominated by us, has resulted directly or indirectly from any condition that the member was known to be suffering from at, or prior to, the start of Cover.”
AEGON UK wholly accepted that Mr. McGaw was suffering from MS, but based on his medical records, claimed that he was known to be suffering from a pre-existing condition prior to the commencement of the policy. That related to the diagnosis of an eye condition three years earlier.
In 2004, Mr. McGaw had experienced a number of problems with his vision. He had been examined by his GP and a consultant ophthalmologist. The consultant wrote to the GP confirming a diagnosis of retrobulbar neuritis and stating that Mr. McGaw’s vision had returned to normal. It is important to make it clear that at no time was Mr. McGaw advised that the diagnosis suggested other more serious neurological problems. Even in his medical notes, there was no suggestion of possible or suspected MS at that time.
The insurance provider took issue with Mr. McGaw’s diagnosis of retrobulbar neuritis, saying it was a possible indicator of MS. I should point out that it is not a cause of MS. Mr. McGaw’s consultant has confirmed that more than half of those diagnosed with the eye condition do not go on to develop MS. Given that Mr. McGaw was not referred for any further tests in November 2004, it is difficult to argue that he was known to be suffering from a relevant condition when he joined the critical illness scheme, or that any of his medical advisers suspected that he was suffering from MS. Nevertheless, AEGON UK refused the payment on those grounds.
In April 2008, Mr. McGaw appealed the decision to refuse payment, but that was rejected. Later that month, he appealed to the financial services ombudsman who, after considerable delay, rejected the appeal. The FSO accepted that Mr. McGaw had fallen foul of the two-year rule and that the diagnosis of retrobulbar neuritis was a relevant pre-existing condition.
Mr. McGaw approached me as his Member of Parliament in April 2009. I wrote to Mr. Otto Thoresen, chief executive of AEGON UK, raising a number of concerns and asking for the case to be reconsidered. Mr. Thoresen declined to reconsider the decision and rehearsed in detail the argument about a known pre-existing condition. The letter emphasised that, under a group policy, no underwriting work is carried out before cover is granted. Had underwriting taken place in June 2005, MS would have been specifically excluded from Mr. McGaw’s cover, given his known medical history. I find that incomprehensible, given that Mr. McGaw’s consultant has confirmed that retrobulbar neuritis is not a cause of MS.
Having exhausted every other avenue, the only method of appeal open to Mr. McGaw is the civil court. That option is prohibitively expensive and carries no guarantee of success. There is case law in regard to a personal, rather than group, policy in which an insurer’s decision to reject a similar claim was overturned. In that case, which came before Lord Eassie, a pre-existing eye problem and subsequent diagnosis of MS were again the matters under dispute. In finding for the plaintiff, Lord Eassie ruled that the insurer requested access to her medical records only to avoid payment, as it did not dispute the diagnosis.
Under a personal policy, insurers are required to allow for three types of non-disclosure: innocent non-disclosure, as in the court case I have just described, where full payment must be made; negligent non-disclosure, where partial payment is made; and deliberate non-disclosure where no payment is made. It is clear that under a personal policy, Mr. McGaw would have been entitled to at least partial payment, if not full payment. Sadly, my constituent appears to be a victim of the very different terms and conditions that pertain to group policies and personal policies.
Throughout the UK, employers offer group policies as part of their package of employee benefits and thousands of individuals take up the opportunity in good faith. They assume that they are gaining, at some considerable saving, the sort of cover and security for themselves and their families that would alternatively be obtained only by taking out a personal policy. I am less than convinced that in promoting such group policies, insurers make it sufficiently clear that the cover members will enjoy is significantly lower than the member might assume. Mr. McGaw is a reasonable and intelligent individual, but at no point did he realise that the policy would not provide him with the assumed cover until his claim was refused.
I trust that the Minister will agree that those who believe themselves to be covered by such group policies should seek further independent advice to confirm exactly what they are covered for. Having acquainted myself with Mr. McGaw’s case, my concern is that thousands of employees in this country who think that they are covered for critical illness, would be put in an intolerable financial position, along with their families, if such an illness arrived. I have come to the unfortunate conclusion that AEGON UK has, through its dubious and cynical processes, severely let down my constituent in a most tragic, callous and unforgivable way.
It is a pleasure to serve under your chairmanship, Mr. Fraser. I thank my hon. Friend for securing this debate.
The regulation of the insurance industry is an extremely important issue and I listened with interest to my hon. Friend’s speech. I was saddened to hear the case of his constituent, Mr. Paul McGaw, in relation to both his suffering from multiple sclerosis and his inability to claim on his critical illness policy. I am sure my hon. Friend will appreciate that I cannot comment on that individual case today, but I will provide an overview of how the insurance industry is regulated and describe recent improvements to the protection of insurance customers. I will cover critical illness insurance and group critical illness insurance in particular. I will go on to mention recent and proposed improvements to insurance industry regulation. I will focus in particular on the proposed Law Commission reforms.
There have been a number of improvements in consumer protection and regulation for insurance before and after Mr. McGaw’s claim in 2007. I recognise that that knowledge will not alter his situation or offer him much comfort. However, it is important that we highlight the excellent work that has been done to improve insurance regulation in recent years.
My hon. Friend will understand that many decisions about the regulation of the insurance industry, especially in relation to consumer protection, are made by bodies specifically established to act independently of Government. The Financial Services Authority is the lead regulator for the insurance industry, and the Competition Commission and the Office of Fair Trading have important roles in ensuring that insurance markets do not function in a way that leads to consumer detriment.
The Financial Ombudsman Service acts as an independent and impartial dispute resolution service and provides a safety net for consumers with complaints against financial services firms, and I am glad that Mr. McGaw sought its opinion on his case. By their nature, financial services, including insurance, often create complex consumer issues. The FOS provides an economical and accessible resolution service to determine what is fair and reasonable on the basis of the facts of the dispute.
It is important that regulators maintain confidence in the insurance sector because the efficient transfer of risk through insurance is an important social function. It allows people to get on with their lives without having to worry about risks that they are unwilling or unable to bear. By paying out hundreds of millions of pounds per day in claims, this crucial industry provides a service to society and individuals when they are in distress.
However, as recent cases involving payment protection insurance and mortgage payment protection insurance have highlighted, poor sales and administration practices can lead to unfavourable consumer outcomes. That is why it is as important as ever that we ensure that a robust supervisory regime is maintained and improved in order to protect consumers while at the same time allowing the industry to continue to innovate and grow.
We as a Government are committed to working with the regulators and the insurance industry to continue to improve consumer outcomes. That aim was restated in last year’s report of the insurance industry working group, which was co-chaired by the Chancellor and Andrew Moss, the chief executive officer of Aviva. Made up of leading industry figures, the group set out its vision for the insurance industry in 2020, stating that it wanted the UK to be the leading global centre of excellence for insurance, and recognising that better consumer outcomes were fundamental to achieving that vision.
In recent years, we have collectively delivered several significant improvements to consumer protection and wider social outcomes. The FSA, OFT and Competition Commission have worked to improve the quality and distribution of payment protection insurance products, which are known as PPI policies. The FSA agreed an end to the sale of single-premium PPI policies in May last year and imposed substantial fines for mis-selling PPIs. It is also consulting on new guidance detailing how companies should process PPI complaints, and requiring firms to reopen 185,000 PPI complaint cases.
The FOS continued to help to protect PPI consumers by offering independent arbitration. Furthermore, the Government have introduced equalities legislation that will prohibit unjustified discrimination in the provision of goods, facilities and services.
To move on to critical illness insurance products, critical illness cover provides a lump sum in the event that the policyholder suffers from a specified illness or undergoes a specified operation. In 2008, more than 50 families and individuals a day were helped at extremely difficult times in their lives by claiming on their critical illness insurance policies. The average claim was £63,000, which is more than double the average UK annual salary. Currently, some 12 million people in the UK are protected by a critical illness policy.
Critical illness policies will pay out if the policyholder suffers from one of a list of predefined illnesses rather than from any condition that could prevent an individual from working. Typically, such policies will also not cover pre-existing illnesses if symptoms had started to develop, or conditions that develop within a relatively short period of cover being taken out.
For group critical illness cover, the employer takes out a policy for the benefit of the members of the group scheme. However, the individual members are not party to the insurance policy. In group insurance, it is common for individuals to be asked relatively few underwriting questions up front and for the insurer to mitigate the risk of having less information through exclusions. That approach is taken because it is cheaper and easier to run, which means that policies can be offered at more affordable prices. It is not unique to group policies; other insurance products—for example, several individual travel insurance policies—also take that underwriting approach.
It is worth noting that individuals who find that they cannot claim on their group policy due to exclusions such as a pre-existing medical condition would most likely also have had an exclusion applied if they had attempted to take out individual cover. As a result, they would not have been able to claim even if they had bought an individual policy and fully disclosed their health status. However, we recognise that it is more likely that the customer taking out an individual policy would be aware of the exclusion at the point of purchase than the group member. Again, that highlights the need for clear, simple products, appropriate financial advice and enhanced financial capability in consumers.
The Government and the regulator have taken several steps to improve regulation and achieve better consumer outcomes from critical illness and other insurance products. In January 2008, the FSA published the “Insurance Conduct of Business Sourcebook”, or ICOBS, which applies to all general insurance and protection products and sets out, among other things, how they should be sold. Under the ICOBS regime, insurers are required to explain the key features of the product, to highlight exemptions and to take reasonable steps to ensure that a customer only takes out a policy on which they would be eligible to claim benefits. The FSA’s Treating Customers Fairly initiative sets a high standard for product design, for information and advice provided to customers and for the after-sale conduct of insurance companies.
However, it was identified in 2007 that too many complaints about critical illness policies were being received and upheld by the FOS, thereby indicating a common underlying problem with how critical illness claims were being treated. I am pleased to say that the industry proactively responded to the issues and acted to restore confidence in critical illness products. In January 2008, the Association of British Insurers implemented its guidance for non-disclosure, which was upgraded to a code in January 2009. This mandatory code sets out how firms should treat customers who have inadvertently or otherwise failed to disclose relevant information to the insurer.
The code states that insurers should pay out if the customer made an innocent error in not disclosing information, unless such information would have meant that insurance would not have been offered in the first place. If the pre-existing medical condition does not relate to the claim, insurers must consider a claim. Therefore, the difference in the treatment of disclosure between group policies and personal policies that was highlighted in my hon. Friend’s speech, and was exemplified in the Scottish judgment to which he referred, would no longer arise. I appreciate that that will be scant comfort to his constituent.
The ABI also has a statement of best practice for critical illness cover. It aims to make the critical illness market more straightforward for consumers through the use of standard terminology and covered conditions. Both of the ABI codes relate to group as well as individual critical illness cover.
The combination of industry best practice and regulation has successfully improved the position of those who take out critical illness policies. The payout rate for critical illness has increased from 80 to 90 per cent. in three years. The number of complaints received and the proportion upheld by the FOS have also decreased as a result of the improvements.
Although significant steps forward have been made in improving customer outcomes through better, more robust insurance regulations and industry best practice, more still needs to be done. Too many consumers still do not fully understand what is and is not covered by their insurance policy. Work will continue on Government and industry programmes aimed at improving customers’ financial capability to ensure that they have the skills that are required to decide what products are suitable for them.
Furthermore, despite the good work done by the FSA, the FOS and the ABI to improve standards for critical illness and insurance in general, we recognise that the law on what consumers have to disclose to insurers is based on a statute that is more than 100 years old: the Marine Insurance Act 1906. It was designed specifically for marine insurance, consumer insurance being practically unheard of at the time. Under that statute, consumers have a duty to volunteer all information that would have an effect on the mind of a prudent insurer. Thus insurers can refuse to pay out if a policyholder failed to disclose any information that the insurer, as opposed to the policyholder, deems to be relevant, even if the consumer answered honestly and reasonably all questions asked, for example, in relation to a pre-existing medical condition—no matter how innocuous.
That position has been mitigated over the years by way of ABI codes of conduct, FSA rules and FOS decisions. However, the result remains unsatisfactory, and the original 1906 statute has merely been over-layered to reduce its otherwise harsh effect. Further, the existence of the current patchwork of rules and codes makes the position confusing for consumers seeking to understand their rights and obligations. We support the Law Commission and the FOS view that in the long term such a disjoint between consumer interest and, indeed, industry best practice and the law is not sustainable. In the event of a dispute over customer disclosure, the FOS can use its powers to rule on what is fair and reasonable. However, if the case goes to court, the court will be forced to apply the 1906 Act.
Although it is commendable that, on the whole, regulatory and industry action has served to mitigate that gap, it is logical that we should consider amending the law to reflect the current consumer position and to provide even greater clarity and protection for consumers. The Law Commission and the Scottish Law Commission published a joint report and the draft Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation Bill in December 2009. That draft Bill would largely reinforce current regulatory and industry best practice by clarifying what it would be reasonable to expect customers to disclose and setting out how insurers should deal with inadvertent non-disclosure.
The Law Commission’s consultation on the draft Bill received a favourable response. The ABI is supportive of the proposals and, out of 39 responses from insurers, only four argued against the reform. We fully support the aims of the Law Commission in reviewing pre-contract disclosure and misrepresentation in consumer insurance law. The Law Commission’s proposals will be considered thoroughly in the round with other priorities for legislation at the appropriate time, and my officials are in regular communication with the Law Commission as it progresses that work.
We have heard that a great deal has been done in recent years to improve the regulation of the insurance industry and to ensure protection for consumers. Particular attention has been paid to critical illness policies and to ensuring that policyholders are treated fairly. I would like to assure my hon. Friend that it is also clear that consumer protection in this area is challenging. We will need to continue to work regularly with regulators and the industry to ensure that insurance products are regulated effectively.