March 25, 2019

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Life Insurance Industry and Legal Challenges

- Sankalp Jain, VP & Head-Legal [ HDFC Life Insurance ]


Traditionally, the most interesting and difficult issues to navigate are the claim settlement and repudiation process which have an impact on the perception of the life insurance industry and its functioning...

Life insurance is based on a concept called risk pooling, or group sharing of losses. People exposed to a risk agree to share losses fairly or on an equitable basis. They transfer the economic risk of loss to an insurance company. Insurance companies collect and pool the premiums of thousands of people, spreading the risk of losses across the entire pool. By carefully calculating the probability of losses that will be sustained by the members of the pool, insurance companies can equitably spread the cost of the losses to all the members. The risk of loss is transferred from one to many and shared by all insured in the pool.

Growth Prospects

Life Insurance is one of the fastest growing and emerging sectors in India. With a population of over 1.34 billion, India’s life insurance penetration rate is still below 3% of GDP. Awareness about the true purpose of life insurance or long-term savings and protection instrument, is still quite low.

As per FICCI, India’s insurable population is anticipated to touch 750 million by 2020, with a life expectancy at birth of 74 years. Demand for annuity and retirement policies with increasing life expectancy even as the proportion of India’s elderly population (> 65 years of age) will increase by ~ 50% to 120 million by 2030. Apart from these factors, the prospects will be further propelled by high historical nominal GDP growth, moderate-to-low inflation, improvement in the financial savings rate, initiatives undertaken by the government to ensure adequate social security, favorable demographics, growing awareness of insurance and regulatory changes. However, the Indian life insurance industry will have to make a concerted effort towards increasing life insurance awareness so that people invest in life insurance for the right reasons and more importantly, stay invested in it over the long run.

Industry Challenges

There are plethora of challenges faced by the life Insurance Industry ranging from mis-selling, money laundering, fund management, maintaining solvency margins, litigation issues, frauds, prompt customer servicing, disruption by fintech, rural penetration, distribution challenges, disruption of traditional distribution models. However, traditionally, the most interesting and difficult issues to navigate are the claim settlement and repudiation process which have an impact on the perception of the life insurance industry and its functioning. The claim repudiations result from material non-disclosure of health conditions, false disclosure of income by the customers, non-disclosure of preexisting diseases e.g. diabetes and hypertension, existence of multiple insurance policies fraudulent representation of death. Some of these material non-disclosures and their impact and challenges faced by insurance companies are set out below:


Legal Challenges:

1. Material non-disclosure of health:
If a customer while completing the proposal form does not furnish his correct health condition or is suffering from any ailment and does not disclose it, then it is considered as a material non-disclosure of health. The Insurance company while doing the risk assessment, factors in the health related disclosures and accordingly prices the premium, depending upon the health condition of the proposer. The Insurance company can rightfully repudiate the claim if a customer has not disclosed his health condition accurately based on the principle of utmost good faith.

Normally, the customers fail to disclose the correct existing health condition, the insurance companies repudiate the claim, after which customers either approach the Ombudsman or file a complaint before the Consumer Forum. The Insurance companies typically defend such matters before Ombudsman and Consumer Forums.

Any concealment of material facts by the customer leads to negative repercussions and related incorrect risk assessment by the insurance company. For instance, life insurance companies, normally segregate the quality of lives depending upon the state of health of the people. Healthy people are accorded a higher status in the table and different (lower) rates of premium are applicable to them since their risk of ill health is lower. If a person suppresses facts about his ill health and manages to buy a policy at rates applicable to the low risk group, then other policyholders in the same group have to share his risk. This results in adverse selection and ultimately unworthy processing of claims impacts the pool funded by genuine policy holders and profitability of the insurance company.

2. Existence of diabetes/hypertension:

There is a perception that diabetes (DT) and hypertension (HTN) are lifestyle diseases and its non-disclosure may not impact risk underwriting. However, there is ample medical evidence available on record, which exhibits that existence of such diseases whether controlled or not, negatively impacts the human body and risk underwriting for such an individual cannot be at par with a normal healthy individual. The difference in risk underwriting and human life value varies in both the circumstances, and the right to underwrite risk would vary. Further, on processing such tainted claims, these costs are borne by the insurance company. As a precaution, non-disclosure and its impact should be clearly explained to the customers while obtaining life insurance. Further, Insurance Ombudsman and various Consumer Forums have generally inconsistent views on the non-disclosure of DT and HTN, and it would be prudent, based on medical evidence and guidance, such authorities understand this anomaly and settle the law on this matter. This will help consumers understand the importance of right disclosure and prevent insurance companies from processing unworthy claims due to conflicting judicial precedents on the matter, which requires further deep deliberation and analysis.

3. Existence of multiple insurance policies:
A customer has multiple insurance policies, but does not disclose it while applying for a new life insurance and does not treat it as material non-disclosure. This perception of material non-disclosure is incorrect, as the premium calculated by the insurance company through financial underwriting is based on human life value (HLV) which is calculated by considering certain parameters like existing income, savings, future earning potential, liabilities etc. From the HLV calculation, the total cover amount is arrived at, and the life insurance company deducts the existing cover amount. Then, the life insurance company will check whether the remaining insurance cover amount is higher than the insurance cover amount than the customer has applied for. If yes, the life insurance company will process the client’s application. Concealment of such critical information especially, in high values policies results in incorrect HLV calculation, risk assessment by the Insurance company, and processing of an undeserving application. Few Consumer Forum judgments, have ignored the human life value concept, which is the recognition of the value of a human life and the possibility of compensating for the loss of that value only, which is critical in insurance business.

Non-appreciation of this principle has resulted in processing of undeserving claims at the cost of genuine policy holders. Further, aggrieved by such orders, the insurance companies subject genuine claimants to higher scrutiny and additional processes, which further derail the processing of claims.

4. Statutory embargo:
“Section 45 of the Insurance Act – Policy shall not be called in question on the ground of mis-statement after three years.

Provisions regarding Policy not being called into question in terms of Section 45 of the Insurance Act, 1938, as amended from time to time.

01. No Policy of Life Insurance shall be called in question on any ground whatsoever after expiry of 3 yrs from:
a. the date of issuance of Policy or
b. the date of commencement of risk or
c. the date of revival of Policy or
c. the date of revival of Policy or

02. On the ground of fraud, a Policy of Life Insurance may be called in question within 3 years from:
a. the date of issuance of Policy or
b. the date of commencement of risk or
c. the date of revival of Policy or
d. the date of rider to the Policy whichever is later

For this, the insurer should communicate in writing to the insured or legal representative or nominee or assignees of insured, as applicable, mentioning the ground and materials on which such decision is based.”

In view of this provision, Insurance companies cannot repudiate claims after three policy years from the issuance of the policy on ground of misrepresentation, non-disclosure, including fraud. It puts the onus on the insurer to do proper checks at the time of underwriting. The objective being need for robust underwriting process so that all issues are flagged before the policy inception.

However, this three-year embargo has also resulted in mushrooming of systematic frauds with an intent to deceive the insurance companies. The embargo of this provision prevents life insurance companies from repudiating claims after three years, even if any frauds are detected at a later stage. It is interesting to note that there are prevailing judgments passed by various High Courts and Supreme Court of India in other commercial transactions which relax expiry of limitation period to refute a transaction, in case fraud is detected by applicant at a later stage, if reasonable diligence was done. This principally means that in case of fraud cases, relaxation in application of limitation period can generally be given if reasonable diligence is done. In view of such related jurisprudence, equity and natural justice demands that an exception be carved out in Section 45 of the Insurance Act, 1938 or an opportunity be given to the Insurance companies to make appropriate submissions in fraud matters detected beyond three years before various Forums and not dismiss such matters outright due to application of Section 45.

Such reformative measures will prevent draining of resources on navigating various challenges posed by ever increasing litigation cases, legitimacy of frauds, frivolous claims, clogging of judicial machinery.

An ideal harmonious blend will be, if insurance companies can consider implementing additional stringent diligent checks while issuing policies, and pragmatic judgements are passed which enable progressive and balanced interpretation and implementation of laws. This can ease a lot of operational pressure on insurance companies which can then concentrate further on devising new path breaking products, providing superior customer experience, increasing penetration of insurance products in rural areas.

Disclaimer – The views, thoughts, and opinions expressed in the article are personal views of the author and do not represent the views of the author’s employer, organization.


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