SERVING CONSUMERS

RISK-BASED UNDERWRITING

Avoiding unintended consequences

“Right to be forgotten” debates must be based on sound actuarial principles, statistical data and medical knowledge

The right for cancer survivors to have their diagnosis and treatment “forgotten” when applying for financial services is a fairly recent concept and it is a highly sensitive and emotional one.

The question may arise whether some survivors of certain cancers have difficulty accessing the life insurance they need to secure credit or a mortgage, even though cancer survivors have no difficulty accessing most types of private insurance, be that home or motor insurance, liability protection or other types of cover. Despite there being no reliable data on the extent to which this is an issue that certain cancer survivors may face in practice or on its impact, policymakers in some EU member states and at EU level have seen a right to be forgotten (RTBF) as a possible solution. There is a very real danger, though, that such schemes could harm far more policyholders than they help because they jeopardise the risk-based underwriting that underpins private insurance.

National schemes …

A number of EU countries, such as Belgium, Cyprus, France, Ireland, Luxembourg, the Netherlands, Portugal, Romania and Spain, have introduced an RTBF or are considering one. All are fairly recent — the oldest started in France only in 2016 — and all vary in terms of their timeframes and the products they cover, and their features, such as whether there is an obligation to declare a prior cancer diagnosis, even if the insurer cannot take that information into account for pricing purpose. There have been no assessments yet of any of these national schemes — whose likely impact will depend hugely on their different features. In addition, the RTBF concerns long-term products, so the effect on other groups of consumers, premium levels and product availability is not yet known.

… and EU initiatives

Actions are also being taken at EU level. The European Commission’s “Beating Cancer” plan is a priority for President van der Leyen. It aims to identify any issues cancer survivors have in accessing financial services and — with interested parties including insurers — to develop a code of conduct to ensure fair access, applicable from 2024 (see box right).

The European Parliament’s special committee on beating cancer, BECA, was tasked with evaluating opportunities for EU action to prevent and fight cancer, support survivors and promote research. Its 2021 report called for an RTBF for cancer survivors 10 years after the end of their treatment.

RTBFs have also come up in the reviews of the Consumer Credit Directive and the Distance Marketing Directive and may well be raised by MEPs in other upcoming legislative initiatives.

In the Consumer Credit Directive, the co-legislators seem to have already reached a provisional agreement on the introduction of an EU-wide RTBF for cancer survivors 15 years after the end of their treatment when applying for insurance linked to credit loans of up to €100 000, although technical discussions continue and discrepancies exist in the current text that could give rise to legal uncertainty.

In the Distance Marketing Directive, meanwhile, policymakers appear to have rightly realised that the horizontal nature of the directive means it is not the best place for an RTBF.

“Risk-based underwriting is what keeps insurance fair and financially sustainable.”

Risk-based underwriting is key

Given policymakers’ interest in this subject, it is vital that the likely impact of RTBFs on all consumers — both those who have received a cancer diagnosis and those who have not — is correctly understood. And that requires an understanding of the principles of risk-based underwriting.

Risk-based underwriting is what keeps insurance fair and financially sustainable. It is fully explained in the video on the right. In a nutshell, insurers use data and their long experience of losses to accurately predict the likelihood of a loss occurring in a particular pool of risks. This accuracy allows them to price their products attractively, matching consumers’ needs.

A past cancer diagnosis may be a relevant risk factor because of its impact on mortality and morbidity. Where this is the case, a RTBF may enable the cancer survivor to access financial services, such as insurance, under similar terms to other consumers, including other cancer survivors with no heightened risk. The impact of a past cancer diagnosis may, indeed, depend on various factors, such as the type of cancer, the treatment and the age of the individual. Insurers are constantly updating their risk assessments as cancer treatments and prognoses improve, and past cancer diagnoses are only reflected in pricing when they present increased risks. Individuals with a past cancer that has no impact on their mortality or morbidity risk will therefore pay similar premiums to other consumers.

Cancer survivors’ access to financial services is important. And insurers’ access to consumer data is also necessary. Depriving insurers of this access will increase the uncertainty around the likely losses in the pool of risks, potentially leading to insufficient reserves to pay claims. This forces insurers to increase premiums for everyone, including cancer survivors, to make sure that there is enough money to pay an uncertain level of claims. Higher premiums, combined with a potential decrease in benefits, could in turn mean that fewer people choose or can afford to take out cover.

RTBFs could, therefore, potentially reduce the availability and affordability of insurance cover for the majority, including those whose past cancer does not present an increased risk. A poorly conceived RTBF in terms of the diseases it covers and the timeframes it imposes could harm more than it helps.

To address the problems that a poorly designed RTBF could raise, it is of the utmost importance that insurers remain capable of accessing consumers’ cancer data, even if the cancer risk factor is not taken into account for pricing. Access to consumers’ data preserves information symmetry and allows insurers to determine the composition of their portfolios and the claims reserves required. It will still impact consumers. Cancer survivors who would have paid a higher premium under a risk-based underwriting system will pay a lower premium, whereas consumers with no past cancer and cancer survivors with a past cancer but no heightened risks will have to pay higher premiums.

Nonetheless, this alternative, which gives insurers access to cancer data, at least mitigates the detrimental consequences of an RTBF, ensuring that people still have access to insurance without damaging the core function of risk-based underwriting.