A good case can be made for a radical change to insurance disclosure law, from an emphasis on non-disclosure to one on misrepresentation. This was the path which the UK reform took, and this option needs an in-depth analysis. What this means is that rather than consumers being expected to know everything an insurance company requires, they are merely obliged to answer the questions put to them honestly. 

Massey University’s research indicates that consumers have little awareness of their disclosure duties and intuitively rely on the advertising promise to “look after you”. Consumers think their duty is only to answer questions honestly. When informed of the law, consumers respond with shock and this contributes to under-insurance. Consumers thus assume current law is based on mis-representation. 

In general, non-disclosure law allows insurers to ask very few questions at policy creation. There is often very minimal underwriting and non-disclosure issues are not brought to the customer’s attention. It is only at claim time that non-disclosure issues are raised – and then it is too late for the customer to make other insurance arrangements or accept a loading. 

The review of disclosure law needs to carefully consider looming technological issues. When the Law Commission wrote their 1998 report or when the 2007 Cabinet Paper was written, technology meant that insurers had very limited capacity to ascertain what risk factors clients were affected by and could only obtain that information by asking clients at application or claim time.

One of the reasons for this was costly to ask questions, it was costly to underwrite, it was costly to offer customised terms, it was costly to gather information, and it was costly to communicate. It was not possible to ask a long list of questions, and it was not possible to modify questions asked based on responses. It was therefore more efficient to ask detailed questions of the far smaller number of customers who made a claim. 

A range of things are about to change in insurance, which the law needs to adjust for; 

(i) End-to-end software will allow the automation of most administrative processes and reduce the cost of transactions so that it will be feasible for all customers to be underwritten at policy inception. 

(ii) Most customers will initially interact with insurers via online systems, either PC, or tablet, or mobile phone, or webpage or video, or chatbots.  Customers will interact via a range of options even within the same enquiry. This means that policy search, policy comparison,
policy condition confirmation and disclosure will have to integrate omnichannel interactions. This allows the consumer questionnaire to be dynamic rather than static, with responses to initial questions creating additional questions or eliminating questions. This reduces reasons for insurers not to be able to ask additional questions. 

(iii) It is difficult to read detailed conditions and to answer detailed questionnaires on a mobile phone. Consideration needs to be made as to an insurer duty to ensure the questionnaire style is suitable to the channel used, so that the awkwardness of the sales channel does not hinder customer compliance. 

(iv) In the longer term, an increasing number of customers will interact with their insurer via linked telematics. These devices allow insurers to set premiums based on ongoing data automatically provided by the customer. This technology allows premiums to be dynamic – for example, car premiums may differ depending on whether the car is being driven or parked. Increasingly, "disclosure" will go from telematic
device to insurer algorithm without the knowledge of the insured. The consumer only needs to give permission for this interaction to occur.

The UK law makes a basic distinction between retail and commercial customers. The law only requires retail consumers to answer the questions asked as accurately and honestly as would be expected of a reasonable respondent, based on what they could be reasonably expected to know. Questions should be specific and not "catch-all". There should be a clause requiring consumers to disclose facts that are exceptional and unlikely to be asked by an insurer, and which a reasonable person would know should be disclosed. 

The insurer is then given a set amount of time to ask more questions, after which the policy cannot be cancelled unless false answers were provided. Despite warnings by UK industry, there have been few difficulties with the new approach, with no change in premiums.  The reform was backed by a very comprehensive report.

The concept of inducement needs to be used rather than materiality. There are three parts to this, (i) the policy creation was induced by the misrepresentation, (ii) that a reasonable person would know they have committed a misrepresentation, (iii) the fact would have been known by a reasonable person in the insured’s shoes at the time of the fact occurring. The later point is important as it is common in health issues for symptoms to not seem relevant until a diagnosis is made. Assessment of misrepresentation needs to be per reasonable knowledge at policy creation/renewal not at claim time. This non-misrepresentation duty needs to be extended to renewals and claims times. Basis of contract clauses and contracting out should be banned, and restrictions placed on the inclusion of specific warranties.

Misstatement needs to take account of insured-specific issues such as lack of English or age if these are known to the insurer, or ought to have been known, and they did not adjust their procedures adequately. The insured needs to have the opportunity to show that they had less knowledge than expected and did not know the fact was relevant. The standard of care required by a consumer can vary depending the manner and the situation in which the information is provided by the insurer to the insured, e.g.; the care expected will differ from an online transaction vs an adviser facilitated transaction. or if during an online application, the consumer is not asked to check figures then the insurer should not later be allowed to claim that due care was not taken.

Other required changes are that there should be a range of remedies, rather than simply cancelling policies, including partial payments. Finally, an Insurance Conduct Act, should include a requirement for insurers to respond to claims in a reasonable and timely manner, given the circumstances.


by Dr Michael Naylor, insurance industry researcher at the Massey Business School.

December 2018

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