Improving certainty of cover in group life schemes

Imagine this: you have switched cover for a small group life scheme.  Not long afterwards a member who has been in the scheme for years dies and a claim is submitted.  The claim, though, is rejected by the insurance company, quite legitimately.  It sounds like a nightmare scenario, but it can come about because of the way ‘actively at work’ conditions operate.

One of the most attractive aspects of group schemes is that a lot of cover can be obtained in return for little information about the people to be covered, thanks to the operation of automatic acceptance, also known as ‘free cover’ – limits.  Any benefits that fall within the limit (usually, the vast majority) are provided without asking anything about the members; only benefits above the limit are subject to health and other information.  The reason why cover can be given out on such a liberal basis is that insurers expect groups to consist of an average mix of people in various states of health, but it leaves them open to the risk of providing cover to some individuals who are actually in much poorer health.  It is to filter out at least some such individuals that group risk insurers apply ‘actively at work’ conditions.  These withhold cover for members off sick on the day cover is due to start; if and when they return to work, cover is provided.

Actively at work (AAW) conditions can be worded in various ways, varying in stringency, which can be applied according to the situation and it is at the insurer’s discretion to decide what wording to use in each set of circumstances.  Whichever wording is used, though, if a member falls seriously ill or suffers a life-threatening accident the day before cover starts, their absence from work the next day means they are not covered, even if they had been with a previous insurer up until then (and so would have been covered had the cover not switched from one insurer to another at that point in time).  Nobody could have known beforehand that the lack of cover would arise, so the issue is not about anyone failing to do their job – it is inherent in the way actively at work conditions operate.

This is not just a problem we have been led to consider in the abstract.  Situations where parties have been left without cover can and do arise, and advisers with long experience of group risk business have flagged the problem.  As well our product development being heavily based on adviser feedback, here at Ellipse we also believe in designing out risk from products and processes wherever we can. 

We have come up with an alternative to actively at work conditions that we believe will be easy for clients to understand and work with.  We now ask clients to tell us of employees who, in the past year, have been off sick for four or more whole weeks if the policy covers up to 500 members, or thirteen or more whole weeks where there are 501 or more members.  (In both cases, the whole weeks of absence need not be consecutive – we want to know about people who have had four separate weeks off sick as much as those who took off one continuous block of time.)  The key is that we are asking for information about what has

already happened rather than imposing a condition around what might happen.  Employers should have the information on file as any absence of more than 7 days requires a note from the employee’s doctor to be provided to them by the employee.

Although this approach requires slightly more information from the client before cover begins, the danger of catastrophic gaps in cover – which fall on the parties least able to carry them – is removed.  From a contract certainty point of view this approach is far superior and provides clients and their advisers with a much clearer and more detailed understanding of what is being insured.

Tom Bond, Underwriting Specialist