Is health insurance still fit-for-purpose? The debate over mental health cover

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Insurance market players have hit back at claims in a recent Consumer magazine article that lambasted the industry for “unfair” practices and slammed mental health exclusions in insurance policies as a sign of “systemic failure in the insurance market which could amount to discrimination on the grounds of mental health”.

Thursday, April 21st 2022, 6:51PM 4 Comments

by Jenni McManus

The article, written after what Consumer described as a “mystery-shop” of 14 insurers, was strongly critical of what it termed blanket exclusions for declared pre-existing mental health conditions at a time when mental health is “a widespread issue in Aotearoa”.

“There’s a disconnected between how the public views mental health and how insurance companies factor that into their policies,” the article stated. It also criticised insurers for taking differing approaches to mental health cover, with some imposing limits and exclusions while others, it said, “can accept you as is”.

But insurance industry players say while they commend Consumer for focusing on New Zealanders’ mental health, they don’t believe its report fairly represents the sector’s approach or the progress it has made in this area.

Richard Klipin, CEO of the Financial Services Council, says he’s disappointed that Consumer failed to test the providers’ products and go through the underwriting process or acknowledge the way underwriting has changed in recent years.

“There was a similar lack of consideration for the many wellness initiatives and actions our members have taken to address mental health, many of which are over and above what is captured in a policy document,” Klipin says.

He says underwriting is an important part of the insurance process and aims to achieve fairness between different groups of customers with different risk profiles. “As mental health-related risks are covered by various insurance policies, it is important that these risks are understood and fairly managed.”

Advisers spoken to by Good Returns say the process is far more nuanced than Consumer suggests. For example, a client’s medical notes are not simply dumped on the underwriter’s doorstep: rather, the adviser will walk the assessor through the client’s medical history and explain any areas of concern.

Whether mental illness, or any other pre-existing condition, will become a problem depends on the nature of the cover being sought (such as health, trauma, critical illness, income protection etc).

It also depends on how the condition has played out. Was it a single episode of mental illness or is it recurring? Was it related to a specific event like the death of a loved one? Is the client on medication? When was the last episode?

Healthcare policies in New Zealand are all about cover for physical conditions. Importantly, they are designed to offer cover for unexpected events that are yet to occur, rather than chronic or known pre-existing conditions.

Most insurers state explicitly in their policy documents that mental health conditions will not be covered though some offer reimbursement for limited psychiatric treatment if required after surgery. The important thing here is that the mental health issue is linked to a physical condition.

Nor is it mental health cover generally available as an add-on to policies, such as dental or optical cover. The exceptions are Southern Cross and nib, which recently began offering holders of gold-level policies limited cover (about $2500 a year) for psychiatric or psychologist consultations.

On their websites, both insurers recognise that good mental health is a key part of staying well. nib says up to 80% of New Zealanders will experience some form of mental distress in their lifetimes “and it’s ok to ask for help”. It describes its mental health offering as a “complementary, limited-time offer” for new(ish)  customers which does not form part of a policyholder’s contract of insurance.

It's a similar situation in Australia where most insurers specifically exclude any form of mental health cover in their policies though some, such as AAMI and nib, will reimburse $300-$400 worth of mental health consultations as part of an “extras” package for those who already hold healthcare policies.

There is no blanket ban on covering pre-existing conditions. Some insurers might agree to cover certain conditions after a period of time, often between two and three years. But there is a group of pre-existing conditions that most insurers will never cover and these are usually listed clearly on the insurer’s website: cancer; cardiovascular disease; knee, hip and back issues; transplant surgery; and reconstructive or reparative surgery.

The most controversial area of insurance where pre-vetting of clients looms large is income protection. With these policies, an insurer will pay out 70-75% of wages or salary if the policyholder becomes ill or is injured and cannot work. The illness may include mental health conditions that have arisen since the policy was taken out, which is why the underwriting for income protection is so rigorous.

According to one adviser, income protection policies are the easiest to rort. Since the pandemic began, he says, claims globally have risen by 400%. Mental health issues, in his view, are “a little bit of a black science”.

“How are you going to prove someone has a mental health issue or not?” he asks. “If a person is clued up, in financial hardship and has an income protection policy that say it will pay him $1000 a week, it’s pretty easy to say you’re stressed or have mental health issues and can’t go to work. They can’t take an x-ray of your brain and see what the problem is.”

He sees a similar situation in Australia where some policyholders are claiming permanent disability from mental illness and are using this to make lump sum claims on their superannuation funds.

Other advisers say doctors need to be more careful about what they write in a patient’s notes. For example, a comment like “has anxiety” when a patient has mentioned in passing that work is a bit stressful can have long-lasting consequences if the patient subsequently needs health insurance.

It would be a perverse outcome, this adviser says, if people were discouraged from seeking help for mental illness because they were afraid it might affect their eligibility for insurance. Some clients are signing up their children for health insurance at birth to avoid later problems with pre-existing conditions, she says.

Klipin says it’s important to remember that underwriters operate from a set of guidelines and when it comes to insurance, there’s no one-size-fits-all. Every individual’s situation is unique and a good adviser can mix-and-match products to suit individual needs.

Underwriting has become “more granular”, Klipin says, to enable insurers to better understand what type of mental health issue the customer is/has experienced and its relative severity.

“All FSC members operate within the industry Fair Risk Assessment Guidelines, which outline principles of fair and sustainable risk management to assess, price and manage the risk of customers needing to make a claim on their policy.”

Kilpin says many insurers now offer wellbeing initiatives and programs to policyholders independent of any policy exclusions.

“Mental health is such an important issue and there is an obligation for everyone to get it right so that we can improve the health and wellbeing of New Zealanders,” he says.

“An investigation that does not involve robust testing of the system could lead consumers to be misinformed and misunderstand the process. We don’t believe the [Consumer] report fairly represents the industry’s approach to this important topic.

Tags: Consumer FSC Mental health Richard Klipen

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