Equal Opportunities Commission Discussion Paper on Insurance Issues under the Anti-discrimination Legislation

INTRODUCTION

1.         The Consumer Council is pleased to submit its views on the discussion paper issued by the Equal Opportunities Commission (EOC) on insurance issues under anti-discrimination legislation.

2.         As a consumer advocate, the Council primarily approaches the issue of discrimination from the perspective of how they affect the operation of the market for insurance services, and fairness to consumers, with a prime concern that consumers have access to:

• competitive prices;
• ample product choices; and
• high standards of service.

3.         The Council's comments on the issues raised in the discussion paper therefore focus on the discriminatory marketing conduct of insurers, which may or may not give rise to illegal discrimination under anti-discrimination legislation. In this regard, this paper sets out the following:

• Industry Regulation;
• Consumer Complaints regarding Insurance Issues made to the Council; and
• Fair and Non Discriminatory Practices and Definition of Terms.

INDUSTRY REGULATION

4.         The discussion paper seeks views on the issue of an industry ombudsman to resolve disputes between insurers and consumers. In this regard, the Council responded to a consultation paper [ 1 ] issued by the Office of the Commissioner of Insurance (OCI) in November 2001 in which it noted concerns on the effectiveness of the current self-regulation system governing the conduct of insurance intermediaries and insurance companies.

5.         In its submission to the OCI, the Council raised for further discussion whether an independent Insurance Ombudsman might be appropriate for Hong Kong as an appropriate forum to consider complaints arising out of an insurance policy (or proposed policy) of insurance.

6.         The aim of setting up the Ombudsman would be to have arrangements which are fair, efficient and simple to administer; and which provide consumers with certainty in terms of a one-stop complaint mechanism and which would encourage firms to resolve complaints at an early stage. The Ombudsman service could be funded by a combination of a general levy paid by all firms and a user-pays element (i.e. case fees) paid by firms for individual substantiated complaints made against them.

7.         However, as insurance products are becoming increasingly sophisticated, the boundaries between such products and other financial instruments are blurring and the products are sold by a range of different types of businesses.

8.         For example, banks, securities houses, and insurers can sell insurance and insurance-related investments. In these circumstances it might be more appropriate to consider a Financial Services Ombudsman instead of a sector specific Ombudsman. In the UK for example, the Financial Ombudsman Service currently handles complaints on behalf of different complaints-handling schemes (including the Insurance Ombudsman) now brought together under one roof.

CONSUMER COUNCIL INSURANCE COMPLAINTS

9.         The Council regularly receives complaints concerning the insurance industry, although they could not be regarded as contributing to a large segment of the Council's complaint workload. For example, in the period April 2001 to March 2002 the Council received 334 complaints related to insurance. An examination of those complaints indicates that the following practices, that suggest an element of discrimination, occurred.

Nature of complaint

• *    Premium charged for unwanted cover (#)
• *     Refusal of cover on sports cars @
• *     Refusal of renewal after claim
• *    Age discrimination

Note:

(#)    it is likely that opt-out practices were used in promotion
@      include cases where premium quoted are so high that it amounted to a refusal

10.         The manner in which consumers' concerns in relation to these types of complaints can be resolved are varied, and discussed further in this paper.

FAIR AND NON DISCRIMINATORY PRACTICES & DEFINITION OF TERMS

11.         The discussion paper poses a question as to how insurance practices can be made more open and transparent, so that applicants may have more information about the insurance decision and basis upon which it is made.

12.         The basis upon which consumers usually make their decisions as to who to choose as an insurance provider is limited to the application form, supporting documentation, and representations from the agent.

13.         The most important source of information is the application form, due to the strict interpretation that can apply to the terms and conditions found therein. In particular, with regard to pre-existing conditions.

Exclusion of pre-existing conditions

14.         The coverage of health insurance policies is normally qualified by the exclusion of pre-existing conditions; which can raise issues of unfair discrimination. Leaving aside the question as to whether the discrimination is illegal or not, it is important for these exclusion conditions to be prominently disclosed, and that the information sought from policyholders clarifies their status in respect of any potential disputes as to what is meant by a pre-existing condition. For example, it would assist policyholders if all application forms stipulated a clear time frame during which applicants are required to note any pre-existing conditions, rather than leaving it to the applicant's interpretation. For example, bound by the entire period of the applicant's life.

15.         In this regard, the Council recently studied the application forms of five insurers, to determine whether exclusion clauses were prominently displayed and were qualified by reference to a particular time period or other criteria. The results of the survey are as follows:

The font size of the application form

16.         Two out of the five application forms did not have warnings as to what effect non-disclosure of pre-existing conditions would have on their policy cover. Even for those three where warnings existed, the applicants might not notice the warning, given the small font size that made reading the exclusion very difficult.

17.         In this regard, the Council urges the industry and the OCI to agree on an acceptable font size for application forms. For example, the Office of Telecommunications Authority and the Estate Agents Authority have both set down their requirements on font sizes to be applicable to some contracts.

Problems in disclosing "existing illnesses and injuries"

18.         As non-disclosure of existing conditions could result in refusal of claims, it is in consumers' interests that they make best endeavors to disclose all the conditions. However, it is not always clear as to what an applicant should disclose.

19.         As noted in the discussion paper, many exclusions are based on industry practice, and there is no correlation between the disability and the pre-existing condition.

20.         Moreover, some consumers may have a perception that if treatment is no longer required for a previous illness, the illnesses can be assumed to have been cured and therefore no longer "existing".

21.         One way in which this issue could be addressed is for the industry and the regulator to explore the possibility of requiring some standard terms and conditions by insurers on how they treat pre-existing conditions. Whilst some insurers might choose to compete on the basis of more favourable terms regarding pre-existing illnesses, the benefits of having an industry standard to avoid confusion and dispute might outweigh the detriments to this level of competition. Some of the issues that could be standardised are as follows.

•     Categories of serious illnesses to be disclosed, i.e. those that require specialist consultation or hospitalization (to avoid consumers being confused as to what constitutes a serious, as distinct from minor illness).
•     The time span requiring disclosure of serious illnesses.

Definition of terms

22.         The Council also shares the EOC's view that the industry should develop definitions for critical terms, such as what is meant by pre-existing conditions. It is equally important to standardise the categorisation of illnesses so that consumers will have clear and accurate information on their entitlement of illnesses under different insurance plans. Complaints received by the Council reveal problems due to the absence of uniformity in categorisation. Even if it is not a deliberate attempt to obscure comparison, it has produced the exact result. In addition, this information should be made available to consumers in a user-friendly manner, with Chinese translations, posted on the insurer's website, and either printed on the application forms or supplied as an addendum to the form.

A standard insurance application form

23.         Given the importance of having a clear and informative application form, the Council suggests that a standard insurance application form could contain the following:

•     the consumers' right under the anti-discrimination legislation and the statutory defence, and the EOC's enquiries and complaints channels;
•     a warning statement as to the consequence of non-disclosure of pre-exclusion conditions;
•     the warning is clearly and prominently spelled out (font size specified);
•     the basis of sharing the cost of a medical report and examination between the insurer and the applicant;
•     the questions must be specific (for example, the insurer should not ask the applicant to provide the list of all doctors he has consulted and should only require details after the applicant has disclosed prior illnesses);
•     Chinese version of an insurance policy and proposal should be made available to policyholders if so requested;
•     the enquiries and complaints channels of HKFI, OCI and IARB are provided; and
•     guidelines and definition of critical terms should be provided to ensure applicants fully disclose existing conditions, such as

• i.    disclosure should only be made on the basis of "to the best of knowledge and belief";
• ii.     unless the insurer can prove there are elements of fraudulent omission, pre-existing exclusion will not apply to any other condition except those that are disclosed; and
• iii.     only those conditions that have been diagnosed by a medical practitioner, required specialist consultation or hospitalization within the last five years need to be disclosed.

24.         With regard to the time limit for pre-existing conditions, the EOC's discussion paper appears to suggest a seven year period is a standard (as noted in the examples on page 13 of the discussion paper). However, the Council's application form survey (paragraph 15 of this paper) indicates a wide variance in industry practice. The Council has chosen an existing time period of five years for its recommended standard given it is more beneficial for consumers; and is currently being used.

25.         Similar standardised practices and forms are found in other Hong Kong economic sectors. For instance, the brokerage and estate agent industries also adopt a standard contract setting out the minimum requirements in a contract between an industry operator and a customer, which the operator can alter to a limited extent to suit its own needs.

Bundling of insurance and non-insurance products

26.         Insurance products are now commonly being bundled with other non-insurance products, such as "savings plans" offered by banks and insurance intermediaries. To allow for greater transparency and for consumers to make an informed decision on whether the price and scope of insurance policy matches their needs, and whether there may be some discriminatory practices in the product being offered, insurance premiums should be separately quoted from the cost of the other non-insurance services or products.

Actuarial calculation for insurance decision, premium, cover

27.         When quoting premiums to an applicant, the agent usually inputs data such as age, smoking habits etc. into a computer; and the insurance decision and the premium are auto-generated. The Council understands actuarial calculations can be very complicated and the model used might be viewed as intellectual property by the insurer who may not be prepared to disclose it to applicants.

28.         Nevertheless, the Council recommends that insurers produce a leaflet to give a general description of the actuarial model used, assumptions, valuation method used and the type of information used in the premium assessment exercise. The increased transparency can enhance consumers in a better position to make an informed choice as well as identifying any discriminatory method used.

Discrimination on the ground of sex

29.         The Council notes that sex is often used as a criterion for distinction in insurance, usually based on broad-brushed group classifications with no clear understanding that the distinction is referable to actuarial or statistical data. Individual variances within the class are also not considered.

30.         One way to resolve this would be to have an industry standard of introducing unisex pricing, to eliminate potentially unlawful sex discrimination.

31.         Nevertheless, broad-brushed group classification of consumers could still be problematic. As noted above in the Council's complaints data base, some insurers have an outright refusal or charge huge premiums for sports car drivers regardless of the background of the drivers. This could be said to be indirect sex discrimination as quite often sport car purchasers are male.

Requests for information

32.         The Council supports the EOC's view that insurers should only ask relevant questions for determining risk. Very broad questions or requests for information which appear irrelevant or based on stereotypical assumptions may lead to an inference that the purpose of the question or request is to unlawfully discriminate. It could also lead to confusion as to what the consumer is actually agreeing to and purchasing.

33.         The Council notes from the survey of application forms, for example, that there are questions asking the applicant whether his immediate family member or members have ever had mental illness. In the absence of evidence to prove that this illness is genetically linked, this question appears to be irrelevant, and possibly unlawfully discriminating against those applicants whose immediate members have the illness.

34.         Other questions require the applicants to disclose health status of family members, or other insured under cover (usually the applicant's spouse or dependents). This is onerous for an applicant to answer, because the applicant may not be told of the health status of a spouse, not to mention parents or siblings. It also raises questions as to whether illnesses disclosed can reasonably be assumed to be genetically linked.

CONCLUSION

35.         In conclusion, the Council supports the EOC's initiatives as posed in its discussion paper, and considers that consumer education is most important to ensure broad based awareness of anti-discrimination principles. In this regard, the Council will be happy to work with the EOC and the concerned industry.

Notes:

1.    Review of regulatory system for insurance intermediaries issued by OCI in Nov 2001. A copy of the Council's submission can be found at www.consumer.org.hk .