Settlement Offers in Australia, New Zealand and South Africa – a look across the fence
Issue: August 2016 |
By Rob Frank, Principal Claims Advisor, Sydney
Fionna Kossmann, Manager Claims, Cape Town
Settlement Offers in Australia and New Zealand
This article looks at the challenges and options, as well as providing a practical guide, that insurers need to consider if a settlement of a claim is under consideration.
Disability Income insurers in the Australian and New Zealand markets have, for a number of years, been under increasing pressure to improve termination rates, and claims experience in general, as profit margins tighten. More rigorous claims management and return-to-work strategies remain the primary objectives, but generally the industry accepts that a certain proportion of claims will almost certainly never resolve.
Insurers have the opportunity to create a trigger to identify those claims where the viability of a settlement is considered as an early intervention claims management option, rather than a “last chance” approach to handling a claim.
“Commutation” and “settlement”
Traditionally, the use of the terms “commutation” and “settlement” have been largely interchangeable within the industry for some time. For clarity, commutations refer to the process of making a one-off payment that equates to the net present value of the future or remaining payments due on a policy, discounted for the advance payment of the benefit entitlements. A settlement, however, is a payment that equates to a proportion of the potential liability on a claim and normally equates to a percentage of the current reserve, and it is therefore effectively a reduction on the total of the monthly payments due.
The initial correspondence that triggers consideration of a lump sum settlement can be made by the insurer or policyholder.
Whilst many policyholders are content with the security of regular payments, in certain situations their circumstances may benefit from an injection of capital, either to alleviate debt, finance a career change or simply to adjust their lifestyle. Alternatively, it may simply be an attractive proposition for the life insured to no longer need to justify their claim on a regular basis through completion of forms, attending medical examinations or providing financial information.
Terms and conditions
At this juncture it would be wise to recall that contractually the policyholder is entitled to a regular stream of income and is under no obligation to accept any offer of a lump sum payment made by the insurer.
Consequently, lump sum settlements are made outside the terms and conditions of the policy and are solely intended to bring the management of a claim to a close by finalizing that claim.
Currently most insurers’ approach to settlement considerations are reactive in nature, either to a request from the life insured or policyholder, through a dispute, or due to the inability to gather the necessary evidence to close the claim through other avenues.
Identifying suitable claims
Identifying the right cases for potential settlement may be possible through analysis of a portfolio of claims. Consider the following criteria for a predictive model on which assessment options may be based:
Category 1 – Cases that will resolve within 8 weeks with no, or minimal, intervention.
Category 2 – Cases that will require some claims intervention but should resolve in 26 weeks.
Category 3 – Cases that require significant claims intervention and may resolve within 52 weeks.
Category 4 – Cases that are difficult, complex and are unlikely to resolve or lead to a return to work.
Category 5 – Cases that have less than 10 years to the benefit expiry date and will not resolve.
In this model it is the cases that are identified as category 4 or category 5 that may be suitable and appropriate for settlement consideration. Depending on the analysis of your claims experience, these claims may have the following criteria:
- Severe mental health problems
- Aged over 50
- Reside in a remote location
- Undertake certain occupations
Potentially, insurers may assign the process of identifying and assessing the suitability of a claim for settlement to a third party to allow the case assessor to maintain their existing relationship with the life insured or policyholder and to allow a fresh perspective and review of the claim.
Not every claim will proceed to settlement, but determining eligibility and suitability requires experience, and a consistent approach to analyzing the claim and will be assisted by establishing a series of questions that are consistently applied to all claims identified as potentially suitable for assessment. This will include consideration of the following:
- The policy terms and conditions and criteria for continued benefit payment.
- The consistency of the medical and investigative evidence and how recently this was obtained.
- The life insured’s functional capacity and ongoing limitations in relation to the requirements of his occupation.
- Whether all treatment and rehabilitation options have been exhausted. Whether there are additional mortality or morbidity issues.
- Whether the life insured is capable of making decision of this nature. Legal issues including litigation, debts and child support matters.
- Whether there are any lifestyle concerns.
When the subject of a settlement or commutation is first considered, our recommendation is that the life insured or policyholder is recommended, in writing, to seek appropriate legal and financial advice in order to include consideration of the tax implications of a lump sum payment. This approach offers some protection to the insurer should the settlement process subsequently be challenged. At the same time, the life insured or policyholder should be advised that review of a potential settlement and any subsequent negotiations should not give rise to the expectation that a settlement will proceed.
However, these claims will rarely settle unless the negotiator is able to successfully set expectations around the process. Parties are often focused on dollar amounts rather than focusing on eligibility and suitability for the settlement to be made, and the economic factors that make the settlement viable and commercially sound for all parties.
Medical aspects – mortality and morbidity issues
Once agreement is reached to pursue the option of a lump sum settlement, the objective for the insurer from a claims management perspective is to satisfy itself that the rationale behind making the offer (or accepting the request) of a lump sum payment – namely the expectation that the claim is likely to remain valid (either for Total or Partial Disability Benefit payments) for the duration of the remaining benefit period – has been met. This means ensuring that the mortality risk is not significantly elevated, while the issue of morbidity can be supported by appropriate medical evidence.
With respect to mortality issues, we recommend that once discussions over an offer have commenced, the insurer should request full medical records for the previous 6 to 12 months, depending on the circumstances of the claim, to ensure no recent changes have been made in the mortality risk presented by the life insured, beyond what the insurer was previously aware. Any such change would naturally influence the decision to proceed with a settlement.
From the morbidity perspective, and specifically in relation to claims that include evidence of cognitive impairment or mental health concerns, it would be appropriate to seek confirmation from the life insured’s treating doctor that he or she has the capacity and judgement to make a reasoned decision over the offer of a settlement (if the individual is the policyholder). This would be the recommended best practice even for those cases where the life insured has not appointed a Power of Attorney.
To this end, it is recommended that the same level of concern is given to those cases where there is evidence of a history of gambling, alcohol or drug abuse, episodes of mania or excessive spending.
In addition to reviewing the medical aspects of the case, it would be our recommendation that the insurer has sufficient financial evidence on file to be satisfied that it has a full understanding of the life insured’s financial circumstances that are relevant to the claim.
Once an insurer has established that, based on the additional evidence gathered, no factors would render the claim unsuitable for settlement, we recommend that when submitting an offer of a specific monetary amount to the policyholder or life insured, a clear timeframe for the acceptance and expiry of the offer should be specified in writing. Additionally, any subsequent offers made or negotiated should have time limits attached.
Throughout any subsequent negotiations of the monetary amount to be paid, it should be made clear whether ongoing benefit payments will continue to be made and if so, whether these will be deducted from, or are additional to, any settlement figure agreed.
It is essential that the claim file contains a documented rationale and justification for the offer of a lump sum payment, showing it to be beneficial for both parties and not simply a strategy designed to reduce the insurer’s liability at the expense of the policyholder or life insured and their best interests.
Settlement negotiation plan
Creating a settlement negotiation plan will also help with the success of the negotiations. This should include an “expectations” letter setting out for the policyholder or life insured the process and time that might be taken, and the information that might be necessary. It should make it clear that the process may not lead to a settlement being completed, and that any offer is made without prejudice and outside of the terms and conditions of the policy and either party can withdraw from the negotiations at any time.
Any discussions that take place verbally should be conducted on a “without prejudice” basis and carefully documented immediately afterwards, for obtaining agreement by the other party.
In the event that a settlement figure is agreed by all parties, it is recommended that the terms of the settlement are clearly set out in writing. There needs to be an understanding that the payment is based on actuarial reserving and represents a full and final settlement of all current and future liabilities under the existing claim and the policy as a whole, and under normal circumstances, this settlement will result in the policy being cancelled. If for any reason the policy cannot or should not be cancelled, the relevant circumstances should be outlined very clearly in writing for all parties prior to the settlement being completed.
To ensure that this settlement is clear to all parties, we would recommend that on all settlements a Deed of Release or Form of Discharge acknowledging this fact is signed by the policyholder – or the beneficiary of the benefit payments, if this is not the same person. Additionally, our recommendation is that the Deed of Release is countersigned by the policyholder’s (or beneficiary’s) solicitor, broker, financial advisor, accountant or another appropriate individual.
The goal for insurers continues to be facilitating a return to work for the life insured, if at all possible. However, in some circumstances where this simply cannot be achieved, or alternatively where both parties would benefit from a settlement, then arguably it becomes our moral, rather than contractual, duty to offer the alternative option of a lump sum payment, whilst still looking to achieve a positive outcome on the overall claims experience and bottom line of the business.
Settlement Offers in South Africa
Settlement Offers are still a relatively new tool in the South African insurance market and are thus not yet common practice. This article will outline why settlement offers should be considered more often, when they should be considered and what some of the unique issues are to consider when making settlement offers in South Africa. Settlement offers – Why?
In the field of monthly disability benefits, insurers face increasing pressure to improve claim terminations and experience. Some claims just cannot be managed due to various factors, such as:
- Rural location of the claimant
- Breakdown of the employer-employee relationship
- Secondary gain issues or
- The claimant’s personality traits
These factors make the claims difficult to manage because they affect the access to and quality of information, as well as the overall communication with the claimant. Many South African claimants have a low level of education and manual, physically demanding occupations (such as mine or construction workers). This makes it difficult to rehabilitate or accommodate these claimants in less physically demanding occupations.
A large part of the South African insured population has cover through their employer. This, coupled with a volatile economy and high levels of poverty (and a very limited social security system), means that individuals are dependent on their group insurance cover to pay out should they become disabled. A large portion of the population relies on informal labour to supplement income or pensions with income generated from small businesses. Thus, the lump sum obtained from a settlement offer is at times a welcome cash injection to start a small business if the claimant is no longer able to work in his/her own occupation.
A change in legislation took effect in March 2015 regarding the taxation of Income Protection benefits. Previously, claimants’ Income Protection benefits were taxed as income but this changed such that benefits are now tax-free. This has resulted in increased benefit amounts, with potentially marked increases at the higher benefit amounts. As a result, increased claims incidence and reduced claim terminations are expected.
Although various measures are being considered by insurers, this is a good opportunity for innovation and change in claims management to address the additional risks associated with the change in legislation. One of these claims management tools could be the use of settlements.
Settlement offers – When?
The instances where Settlement Offers should be considered are similar in South Africa to other markets.
These instances include:
- Disputed or litigated claims (that have gone to the Ombudsman)
- Complex or difficult claims to manage or close
- Claimants who suffer multiple conditions
- Claimants with conditions that are difficult to measure objectively (such as pain conditions or psychiatric conditions)
- Claimants who reside in remote areas
- Claimants over the age of 50.
Issues to consider
The process of offering a Settlement Offer, including the drafting ofthe offer and the negotiations, is similar to other markets. The main difference is that given the limited level of education, and specifically financial literacy of the general population, the financial implications must be carefully explained to the claimant, so that the claimant can make an informed decision. We recommend including the claimant’s financial advisor in the negotiations. It would be risky and irresponsible to offer a claimant with limited literacy levels a lump sum without ensuring that they understand the contractual implications of accepting a settlement offer.
Claimants living in rural areas with limited access to healthcare and other jobs would be the ideal type of claimant for potential settlement offers. These claims are difficult to manage as the medical information received is usually limited and it is not possible to rehabilitate the person effectively in these circumstances.
Further, as mentioned, many South Africans are keen entrepreneurs (out of necessity) and would appreciate a lump sum payment to use as start-up capital for a small business if their formal employment is no longer an option due to disability.
Settlement offers can be a viable option for claims closure to the satisfaction of all parties in the South African insurance market. Settlements are currently widely used as a tool to manage or close claims in other markets but are currently underutilised in South Africa. More work is needed to raise awareness of Settlement Offers as a claims management tool in South Africa.