Momentum’s lack of heart is a lesson for the life industry
The Ganas case gives occasion to think more clearly about treating customers fairly
The Momentum PR disaster that was its handling of a life claim by the Ganas family should give pause to the life insurance industry. How did Momentum manage to so poorly understand the needs and perspectives of its clients?
The answer, I think, is that life companies don’t pay much attention to the emotional context in which they operate.
Insurance is a complex industry. It is both about deeply personal and emotive issues, literally life and death, and the profoundly impersonal calculus of probability and risk. Those who run and regulate insurance companies tend to focus on the latter. But clients focus on the need to manage risks that could have enormous consequences for themselves and those they love.
Momentum saw the Ganas case in purely technical terms. The life policy that Nathan Ganas held was declared invalid by Momentum because he had not disclosed a material blood sugar problem that he was, according to them, aware of. This approach is quite normal all over the world. The core philosophical precept to insurance is the legal “doctrine of utmost good faith”. This is an artefact of contract law.
Most contracts do not work this way, instead applying the principle of “caveat emptor” in which the seller only need disclose what he or she is asked. But an “utmost good faith” contract, in contrast, requires both sides to disclose every fact relevant to the contract. If they do not, particularly when the insurance company has been induced to provide the policy because the buyer had kept a material fact hidden, then the contract is made invalid.
This makes a lot of sense in commercial insurance. If I want to insure a ship that is travelling across the Atlantic, I should honestly disclose what that ship will be carrying. The insurer also has a duty to explain the contractual terms clearly, describing when they would or would not pay out. If I have knowledge material to the nature of the risk and fail to disclose it, then the contact is, in the legal terminology “avoided”. All premiums are repaid (unless there was active fraud by the client) and both parties continue as if the contract never existed. This is irrespective of what eventually happens to the ship during its voyage.
This approach is important because insurance is fundamentally about pooling risks. If one policyholder induces the insurer to take on risks they otherwise wouldn’t, it comes at the expense of all other policy holders because the financial position and risks of the pool have been weakened.
But in the life insurance market, things are different. Consumers approach the contact from a deeply emotional perspective in which they are attempting to protect themselves and their loved ones from devastating risks.
Had Momentum properly understood this, it would have approached the Ganas case differently. Ganas had died during a botched hijacking and violent crime is clearly a highly emotional issue for consumers. Momentum’s refusal to pay out appeared heartless, particularly because the non-disclosure by Ganas was unrelated to the cause of his death.
Momentum’s treatment of the Ganas case was confirmed by the insurance ombudsman. He saw it the same way Momentum did – there was material nondisclosure that induced the insurer to take on the contract. Therefore the contract is avoided.
Momentum and the ombudsman clearly were not aligned with a consumer perspective. Insurance companies are being invested with a deep responsibility to care for beneficiaries. Was Momentum living up to this duty of care?
Around the world insurance regulators have been attempting to force insurance companies to think about this duty of care more than they currently do. This is part of the “treating customers fairly” approach that regulators in banking and insurance have applied to firms. This implies that insurers look at a claim from their customers’ perspectives.
No insurer should be expected to pay out when they have been induced to cover a risk that the consumer has deliberately hidden information about. But where someone has died through an unrelated cause, insurers can “reconstruct” the policy as if the disclosure had been made.
That is effectively what Momentum has done. It has created a new side cover for violent crime in the event that there is material non-disclosure. So now there are effectively two contracts – if one is avoided through non-disclosure, then the other will pay out in the event of a death from violent crime. This adds some risk to Momentum, but the number of such cases it is likely to face is small.
Momentum was forced into this because the PR was so damaging. It allows it to pay out in the Ganas case, while still insisting on the importance of proper disclosure at the start.
But the event gives occasion for the life industry and its regulators to think more clearly about how treating customers fairly should work. Arguably, less work has been done on this compared with banking or short-term insurance. The industry is given a deeply personal responsibility by its clients to care for those they love. That has to be squared with the important principles of contract law that apply.
The newly created Financial Sector Conduct Authority is imbued with a responsibility to protect financial consumers. The Ganas case provides an avenue for it to robustly engage with the life industry on how it should treat customers. The Ganas family may have done all consumers a favour.
• Theobald is chairperson of Intellidex.