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Passbacks - How do they work?

Jon Paul-Hale looks into the issue of passbacks, and how they work.

Wednesday, November 15th 2023, 6:01AM 1 Comment

by Jon-Paul Hale

In looking at passbacks, one thing that came through: how do you know which one?

This one is an interesting to consider, as the approach from the providers differs.

Is the provider's approach:

  1. The issued wording or the current wording?
  2. Or the issued wording and every wording between that and the current wording?

Both approaches have their issues.

From my start in the industry in 2000 to about 2010, the industry was on a tick-to-the-bottom approach on trauma wordings, with successive versions being a little worse than the prior as providers coped with new medical technology and managing claims that resulted from better diagnostic techniques.

From 2011 on, mainly with the rise of Partners Life, policy wordings have become more expansive. There are a few exceptions to this, but for the vast majority of policies, they have improved.

This means the wording today is likely better than the wording when the policy was issued.

This leads to the view of passbacks being issued, or the latest is fine. Is it?

Where you have an older policy that has since experienced expansion of terms and then contraction of terms before being called on, with the issued or latest approach, the client may miss out on an intermediate better definition that determines a claim payment when the issued or latest versions don't.

That's not to say the issue and every change between then and now is better.

How do you effectively manage assessing the claim on what could be 20-30 different wordings in between?

If an insurer updates its contract terms every 3-6 months, in just 10 years, you could have this many versions to consider.
- Partners Life is on version 19 presently writing this.

The workload on assessment of the early policies vs today and every wording review in between is significant. Fortunately, with Partners Life, they have been expansive, with the exception of Agreed Value self-employed from memory.

(Those accusing me of drinking the Kool-Aid will likely tell me differently.)

What's the right answer?

  • From the insurer's perspective, issued or current?
  • From the client's perspective, issued all the intermediate versions and the current.

Both have pros and cons. In an environment of client-focused outcomes, the latter is the one consumers will demand once they figure out their current policy doesn't respond but could have two-three versions earlier.

As my wade in the weeds has shown, the management and administration of existing policies isn't an easy subject to navigate.

As advisers, we demand the best things for our clients. Insurers are trying to juggle administration, multiple systems and the associated costs of keeping a system running that has 18 policies left on it.

Back in my time with Sovereign, there was some consolidation of policy systems, one being a cardboard box in the basement.

Rather than build those policies into the existing system, Sovereign decided on a "you win" approach for those clients.

Rather than spend what was likely more than the face values of those policies on their systems, they paid the policyholders early claims. Frankly, with hindsight, that was the exceptionally right decision.

As we enter into what is likely to be a harder market across many products with increased claims pressures from what's going on in society with stress levels and advancement of medical technology, how passbacks work for clients will become a point we need to consider.
QPR with Quote Monster and Strategy Financial Services have both done recent work in the passback space to publish what these are.

Tags: Jon-Paul Hale

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Comments from our readers

On 22 November 2023 at 1:22 pm Steve Wright said:
JP. All insurers should be able to give a record of policy changes made over time (whether they can or not is another issue).

Advisers might also want to check what actually qualifies for an upgrade. For example:
• Does an exclusive upgrade to Indemnity income protection also apply to the provider’s Agreed Value?; and
• Do level and stepped premium options of the same product have separate policy wordings? In which upgrades exclusively to Stepped might not apply to Level premium covers even of the exact same product type.

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