Introduction
When research and development of a new type of insurance fails or insurance products priced low at the time of marketing become unprofitable thereafter, insurers are inclined to amend conditions repeatedly, raise premiums or close down the insurance portfolio by referring to extensive and unspecified insurance conditions.
However, these remedies are not necessarily available under the Insurance Contracts Act, which entitles an insurer to amend conditions and terminate a policy only on the grounds specified in the insurance conditions.
Foreign insurers brought tailored cancer insurance products to Finland in the late 2000s. The risk of developing cancer has increased and cancer insurance has been marketed as a simple product to supplement public healthcare and provide extra income for a small premium each month. This kind of new insurance product is usually marketed and sold over the telephone, which presents certain legal challenges, such as the requirement for insurers to provide applicants with all of the information necessary to choose an insurance policy.
Right to amend insurance conditions
Amendments to cancer insurance conditions and premiums resulted in more than 50 enquiries to the Financial Ombudsman Bureau in 2014. As a result, on August 26 2014 the Insurance Complaints Board issued three recommended decisions pertaining to insurers' rights to amend cancer insurance premiums and conditions.
The circumstances were similar in each case. At the time of concluding cancer insurance contracts in 2007, the applicable policies were for 'level-rated insurance', meaning that the premiums were based on each policyholder's age when the policies commenced would not change as the policyholders aged. However, the insurer later wanted to streamline the policies to provide step-rated insurance, which would be in line with new products where premiums rise as policyholders age and the risk of developing cancer increases. To that end, in early 2014 the insurer informed the policyholders that, due to increased risk and loss development, premiums would increase from the beginning of the following insurance period. The new premiums would be based on each policyholder's present age and would increase as they aged. As the premiums were to rise considerably, many policyholders contested the insurer's decision.
The Insurance Complaints Board found that the amendments to the conditions and premiums had not been made in accordance with the Insurance Contracts Act. The board held that that:
- the grounds in the conditions were not specified in such a way as to meet legal requirements; and
- the reference to evolving insurance products and business was broad and open to interpretation.
Further, the board emphasised that the insurance policies had been expressly marketed by promotion of the fact that the premiums would not change over time.
According to the board's decision, when it had been impossible to amend the insurance conditions, the insurer had terminated the policies and cancelled the insurance contracts. In the notices of termination, the insurer had advised that the premiums no longer reflected the evolving nature of insurance products, operations and its losses.
At the same time, the insurer had offered a new product with a higher premium. The decision causes resistance among policyholders and complaints were filed to the board. On April 19 2016 the board issued four recommended decisions pertaining to insurers' rights to terminate insurance policies.
Policyholders argued before the board that they had been informed at the sales stage that their premiums would not change until they turned 65. The insurer argued that the main reason for termination had been a negative loss experience in general and was unrelated to the policyholders' health or whether an insured event had occurred. According to the insurer, all policies signed in 2007 and 2008 in accordance with the former conditions had been terminated. Where a new method of premium calculation had been agreed on, the policies had not been terminated.
Under Section 17a of the Insurance Contracts Act, an insurer can terminate accident and health insurance pursuant to policy conditions as follows:
"The terms and conditions of accident and health insurance policies whose premiums are payable at regular intervals (premium period) may include a provision to the effect that the insurer is entitled to terminate the insurance policy at the close of any premium period. If the premium period is shorter than one year or if no premium period has been agreed upon, the insurer is only entitled to terminate the contract at the end of any calendar year.
The insurance policy may not be terminated on the grounds that the health of the insured has deteriorated since the conclusion of the contract, or that an insured event has occurred. The reason for termination shall also in other respects be in compliance with good insurance practice.
Notice of such termination shall be dispatched to the policyholder not later than one month before the termination of the insurance as provided in Subsection 1. The notice shall contain a mention of the reason for termination. If termination is not notified as provided in this Section, termination is null and void."
The board found that the insurer had correctly reserved the right to terminate the policies pursuant to Section 17a. It referred to the bill amending the act, stating that termination can also be targeted at the holders of specific insurance policies and that it may be good insurance practice to terminate an insurance policy when, for example, the insurance has become unprofitable. However, termination of an insurance portfolio is usually the final option as insurers prefer first to improve profitability by raising premiums or amending conditions.
The board confirmed that the reason for termination was a negative loss experience and that the residual portfolio subject to the former conditions was unprofitable. As all policyholders had been treated equally, the insurer had had a right to terminate the policy.
However, according to the act, an insurer must inform and provide necessary information before an insurance contract is signed. Under Section 9 of the act, the consequences for an insurer that has failed to fulfil this duty are as follows:
"If the insurer or its representative has failed to provide the necessary information or has given incorrect or misleading information to the policyholder when marketing the insurance, the insurance contract is considered to be in force to the effect understood by the policyholder on the basis of the information received."
Therefore, the board also considered whether the fact that the insurer's representative had advised during the sales process that premiums would remain the same until the policyholders turned 65 had had any effect regarding the termination.
The board stated that, according to the trade description of the insurance, the premiums were to be based on the present age of each policyholder and remain the same throughout the duration of the policy until the policyholders turned 65, as long as they kept the policies in force. On this basis, the policyholders had had reason to believe that the premiums would remain the same throughout the duration of the policy. However, neither the trade description nor other information presented to the board disclosed that the insurer had been committed to keeping the insurance in force since, according to the conditions, it had been entitled to terminate the policies. The board found that the provisions relating to the insurer's duty to inform had not prevented it from relying on the insurance condition entitling termination. However, the decision was not unanimous: two members held that due to the misleading marketing information, the insurer had had no right to rely on the insurance condition allowing termination.
Finally, the board considered whether the termination had been carried out in accordance with Section 17a. It found that, in this respect, legal requirements had not been followed and the termination was therefore null and void.
The board's recommendations serve as a reminder that insurers cannot amend insurance contracts or terminate unprofitable contracts if they do not draft the conditions carefully at the outset and fulfil their duty to inform when marketing their products.
For further information on this topic please contact Matti Komonen at HPP Attorneys Ltd by telephone (+358 9 474 2207) or email ([email protected]). The HPP Attorneys Ltd website can be accessed at www.hpplaw.fi.
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