Why do insurance claims get rejected? And how to avoid the claim rejection!

Picture this: When Mr. Sam was alive, he took care of his family. He also bought a life insurance policy with an appropriate cover for the family to take care of them in his absence. Mr. Sam was also diligent enough to keep a record of insurance policies and share it with the family while he was still alive. When he died, he rested in peace and then shattered into pieces. The reason? The life insurance claim was rejected!

Insurance companies are committed to honouring the claims and they want to process the claim as soon as possible because they empathize with you. The very purpose of an insurance company is to honour claims. After all, why would someone take out an insurance contract from a company that rejects claim very often? So why they reject claims? Let’s find out!

There could be many instances and examples of claim rejection. Most of these can be bracketed in the following three categories.

1. Incorrect or no information: Insurance policy is a financial contract based on trust that both the parties place on each other. Insurance companies rely on policyholders to share all the relevant information and in return promises to pay the sum assured in case of an event. The premiums are decided based on information like age, gender, smoker status, health condition and liquor consumption. However, if the information shared by the policyholder is incorrect or incomplete, the premiums would not be reflective of the risk borne by the insurance company. This defies the underlying assumption of the information being correct and possibly makes it logical for insurers to deny the claims.

Pro Tip: Disclose every relevant information including smoking habit and pre-existing medical conditions. This might translate to higher premiums but certainly would increase the likelihood of claims being honoured.

2. Exclusions & Omissions: Yeah, you got it right, we are talking about the fine prints in the insurance contracts. Insurance companies tend to exclude deaths due to a drug overdose, intoxication and while on adventure sports like scuba diving. In Singapore, the insurers also deny claims triggering from suicide committed in the first year. The rationale is simple — this is possibly not what insurer bargained for as each of these activities spike the mortality rate

Pro Tip: At the time of buying the contract, read the fine prints. It is a contract that would last for several years and could impact the lives of your survivors and hence deserves a certain degree of attention. Additionally, declare about your inclination for adventure activities right at the beginning. For example, when I bought the cover for myself, I did declare and my contract covers me for death while indulging into adventure sports!

3. Lapse: We talked about the lapse in great detail in one of my previous articles. Put simply, the policy lapses when you don’t pay premiums on time and as a result of this, the contract ceases to exist. Clearly, when the contract terminates, paying claims is out of the question

Pro Tip: Set reminders to pay premiums because letting the policy lapse out unknowingly is like forgetting to launch the parachute while skydiving! ISLEY could come in handy in this situation.

While it now might look legitimate for insurance companies to deny claims, one could argue that they can charge higher and ensure that the claims are paid. Well, this is a fair argument. However, the insurance premiums would sky-rocket, which may not be a good idea, especially when a very small fraction of the total insured population fall in the aforementioned three brackets!

I sign off with the hope that you would found the article useful and will disclose all the relevant information, read the fine prints and pay premiums regularly. Look forward to your thoughts at hello@fidentiaX.com and interacting with you on Monday during #AskTheActuary on Twitter at 8 PM SGT!

Disclaimer: The article has been written with an aim to broadly explain an otherwise complicated and technical topic for readers with little or no insurance background. Hence, it doesn’t have finer details but is still broadly correct. The readers are recommended to take advise from their respective financial advisers before taking any financial decision.

About the writer: Mr Sumit Ramani is the Chief Actuary of fidentiaX. He is a qualified Life actuary and a computer science engineer with over a decade of experience in (re)insurance business with focus on modelling of life and health products, peer review and business analysis.