Insurance policy wordings are difficult for most lay people to understand the terms they are signing up to when they take out a personal risk policy, say Associate Professor Aaron Gilbert and lecturer Ayesha Scott, of the finance department of the Auckland University of Technology.
Policy wordings have been in the news since New Zealand tourist Abby Hartley,aged 41, fell ill in Bali in August and battled her illness for more than a month before she passed away, according to a report in goodreturns.co.nz. 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 the case was a reminder to clients to make sure they understood the terms of their insurance policy.
“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," Ms Scott said.
She said she and Mr Gilbert 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.”
Mr Gilbert said insurers needed to stop letting lawyers write their documents.
The Financial Markets Authority said improving the readability of insurance policies is a matter for the Ministry of Business, Innovation and Employment (MBIE).
Ms 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."
Claims declined over pre-existing conditions are the most common travel insurance complaint to the ombudsman.