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Insurance documents 'too confusing'

Insurance policy documents need to be simplified so consumers can understand them, two academics say.

Friday, October 5th 2018, 6:00AM 2 Comments

Policy wordings have been in the news since traveller Abby Hartley fell ill in Bali. Her travel insurer would not pay out because she had not disclosed a pre-existing condition.

Insurance and Financial Services Ombudsman Karen Stevens' office said it was a reminder to clients to make sure they understood the terms they were signing up to when they took out a new personal risk policy.

But Aaron Gilbert and Ayesha Scott, of AUT's finance department, said that was not easy for most laypeople to do.

“The comments by the Financial Services Ombudsman in relation to insurance that travellers should read the policies ignore the fact that the policies are not designed to be read," Scott said.

She said the pair had taken the insurance policy for one of the leading travel insurers in New Zealand and looked at the level required to understand the policy document using readability metrics.

"First, the policy contains just over 18,000 words. People read on average of 300 words per minute, which means to read the policy cover to cover would take nearly 60 minutes.

"Second, based on widely applied readability metrics, this insurance policy was very close to unreadable. Based on the fog index, where 18 indicates a document that is unreadable, the policy had fog of 17.36. Put differently, this would require nearly 14 years of education, a completed undergraduate degree, to understand. One word in five was considered complex, containing three syllables or more. If the ombudsman believes that people need to read insurance policies to know what is and is not covered, and if as she says there is considerable variation between policies from different insurers, then surely there should be an onus on the insurers to produce documents that a layperson can read.”

Gilbert said insurers needed to stop letting lawyers write their documents.

He said KiwiSaver PDS documents had been capped at 6000 words and efforts had been made to improve their readability and accessibility for laypeople. But no such work had been done on insurance.

The Financial Markets Authority said it was a matter for the Ministry of Business, Innovation and Employment.

Sharon Corbett, MBIE's manager of financial markets agreed insurance policies tended to be long, complex and written in terms that consumers might not understand.

"The ability to understand policies was identified as a problem during the first stage of a review of Insurance Contract Law and is an issue MBIE consulted on earlier this year. We are looking at the impact of the problem and considering whether action is appropriate.  It is too early to say what policy options MBIE will put forward in the next stage of the review."

Tags: Insurance Advisers MoBIE

« Clients 'should expect ongoing service'Fraud pushes up policies' premiums »

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Comments from our readers

On 5 October 2018 at 11:05 am Tash said:
Policy documents, being contracts and contractually binding insurance companies to possibly pay millions of dollars to a claimant are relatively detailed and complicated out of simple commercial necessity.
I agree some can be written better, but no contract will ever be simple enough for some. THIS IS WHY A GOOD ADVISER IS INVALUABLE!
On 5 October 2018 at 6:59 pm J-PHale said:
I echo Tash’s sentiment, we are talking contracts that can cover significant sums, far more than the average working life income.

Could they be simpler to read yes, less complex probably not.

This is why specialist advisers are needed to advise on insurance policies. And part of the reason I welcome the new rules even though they are looking like a hammer looking for a nail.

I have a fundamental challenge with a travel agent being able to sell travel insurance without the basic training most RFA’s do get. They often treat it like the same commodity as their clients.

Making the whole situation fraught with non payment risk. Without understanding the fundamentals of why and how these policies work travel agents and self help sites are perpetrating financial malpractice.

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