War of the widows

One in five life insurance claims is refused by the insurers, often on technicalities. Here, Juliet

When my 47-year-old husband, Nikolai, died of cancer he left me and our three dependent children with a £146,000 mortgage and a £250,000 life insurance policy to tide us over the next few difficult years. He died knowing his family would be cared for by Scottish Widows. Six weeks later, regarded by psychologists as the lowest point following bereavement, the insurance company sent me a letter refusing to pay the claim, citing "non-disclosure of material facts".

I was faced with repossession of the house and moving the children (aged nine, 12 and 15) out of their schools and away from friends. My friends told me to put the insurance issue behind me and move on: who was I, a housewife with a part-time job, to take on a huge corporation? But I knew my husband of 20 years to be an honest man. He would never have deliberately withheld medical information.

I, too, had been at the meeting where a Lloyds TSB adviser (Scottish Widows is the bank's life and pensions subsidiary business) had completed our application form for us on her laptop. So what had gone wrong?

Nikolai told her he had been suffering from unexplained fevers for about three months, but that they had recently stopped and he believed he had recovered. Hospital tests and scans had come back negative but he was due to go for more. The adviser, probably accidentally rather than intentionally (though commissions for policies can run into thousands of pounds), wrongly recorded that his fevers had ceased almost a year before our meeting rather than a month before. She also failed to detail the hospital tests. In fact, she made a number of glaring errors on the three-page computer printout application, including wrongly identifying us both as smokers, spelling our address and our names incorrectly, transposing vital dates and giving one-word answers about medical conditions where the form sought "full details".

We were given no opportunity to see the form, which was sent electronically to the Scottish Widows underwriting system immediately. We were then asked to sign a declaration saying we had read through the form and agreed with its content and to sign against our wrongly spelt names. We were told that the completed application form would be sent to us in the post.

I later discovered that it was never meant to be printed out let alone seen by us. Incredibly, the £250,000 contract came into effect three months later with our names still wrongly spelt. I was outraged when the company dismissed this as part of "a few typographical errors".

The automatic underwriting process loaded Nikolai's premiums by 75 per cent with no explanation and no further medical inquiries. Meanwhile, Nikolai naturally presumed this was because Scottish Widows had taken out a GP report following his disclosure of ongoing tests for his former fevers - and also because he had told the adviser he wasn't in good health. Yet it was only when the claim was made that the company decided it required a GP report and then began looking for evidence of non-disclosure - irrespective of whether it was linked to his death. This common practice is odious and devastating for the policyholder.

In fact, one in five life insurance claims is not met because of this kind of "post-claim underwriting". We knew none of this at the time and completely trusted the adviser and the underwriting system. Nikolai, Russian by birth, was an internationally acclaimed photojournalist and had seen a great deal of global corruption. He wanted to bring his children up in an honest, moral society with rules by which both corporations and public abide. He believed that Britain was such a society and would have trusted implicitly a big-brand insurance company.

But, like many insurance companies, Scottish Widows had abandoned its mutual status to become a public company whose sole responsibility is to maximise profits for shareholders at the expense of policyholders. The iconic, caped Scottish widow is just a PR path to profits now. Yet, ironically, the company was originally set up to protect real young widows during the Napoleonic Wars.

Like 548,337 other people that year, I took my case to the financial ombudsman. This service has seen a general upsurge in complaints from people like myself. It took me three years of intense internet research, mounds of paperwork and many weekends and evenings, time that should have been spent with the children.

The company was determined to see me off. I was forced to sell our family home and move to Somerset. Eventually, to my immense relief, three years after my initial complaint, the ombudsman finally upheld my case, finding that, "although the firm's decision to cover the complainant's husband may have been due to a mistake, this mistake cannot be attributed to the complainant's husband; in my judgement, it is attributable to its own automated underwriting processes and data entry error by its agent".

This system of selling policies has now been changed industry-wide, says Scottish Widows. After the final ruling in my favour on 17 August it issued the following statement, which it reiterated to the NS: "In June 2004, Scottish Widows received a life policy claim following the death of Mr Ignatiev. In July 2004 this claim was declined. We do not take lightly the decision to decline a claim, but in this case we were, and still are, of the view that there was material non-disclosure of relevant information. We recognise the important role of the Financial Ombudsman Service in such cases and have always maintained we will accept the final FOS ruling. This final ruling was received on 17 August 2007 and, as a result, we will be settling the claim."

Since Nikolai's death I have uncovered many pitiful and heart-rending stories, where bereaved or terminally ill people have been refused what was rightfully theirs.

Jan Trainer appealed to the ombudsman when her 43-year-old husband Dave was diagnosed with terminal cancer. Scottish Widows refused to pay out, relying on the innocent non-disclosure of an unrelated medical condition. "It's a blatant and cruel use of a technicality to renege on an agreement," says Jan. "As a solicitor, I am up against insurance companies on a daily basis; my work involves obtaining compensation for individuals injured in often very serious accidents. It never ceases to amaze me what tactics are used to avoid meeting their obligation to victims. And the people who have to take on these powerful companies are mostly vulnerable individuals already crippled with emotional pain."

It took the ombudsman's office only three days to uphold Jan and Dave's complaint.

Jerry and Rosemary Horsman, both farmers, were devastated when their daughter Alice was crushed in a farm accident, leaving two small children. Scottish Widows denied her claim because of innocent non-disclosure of a medical condition. Her parents took the case to the ombudsman, but had to battle for two and a half years for justice. "What still horrifies me," says Jerry, "is that the 2001 application form was ludicrously flawed. It was a cheap and cheerful policy to scoop up premiums.

"The inadequate application process makes it ridiculously easy for companies to cherry-pick medical evidence in order to wriggle out of paying. It's shocking to think how many of us are living in a fools' paradise thinking we have cover when we don't."

The ombudsman looks at what is fair and reasonable as opposed to the strict letter of archaic law. However, the Law Commission is now reviewing the 100-year-old insurance law and forward-looking judges, such as Lord Eassie (former chairman of the Scottish Law Commission), are aligning themselves with the ombudsman in recognising that the law is heavily biased against the consumer. Last year, Valerie Cuthbertson, a theatre manager, won a landmark ruling in court when Lord Eassie ruled that Friends Provident was wrong in denying her critical illness cover. Her appeal to the ombudsman had not been upheld but she fought on with the help of legal aid and won through the courts.

We are being mugged by the corporate world. Perhaps ordinary individuals who stand up against the big corporations are the have-a-go-heroes of personal finance.

Do we make a difference? I would certainly like to think so.

548,337 number of complaints each year to insurance ombudsman

1 in 10 UK adults admit to having cheated on an insurance claim

52% of people fail to check life policy details to ensure they have adequate cover

1st reason for life assurance after age 60 is to minimise inheritance-tax liability

70% of insurance sales included hidden extras of which customer oblivious

49% of people never know precisely what they have insurance for

10% rise in complaints about insurance to ombudsman in the year to 2006/2007

£750,000 paid in fines by one insurer after flaws in handling complaints

Research by Jo Barrett

This article first appeared in the 17 September 2007 issue of the New Statesman, How the Americans misled Blair over Iraq

MILES COLE
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The new Brexit economics

George Osborne’s austerity plan – now abandoned by the Tories – was the most costly macroeconomic policy mistake since the 1930s.

George Osborne is no longer chancellor, sacked by the post-Brexit Prime Minister, Theresa May. Philip Hammond, the new Chancellor, has yet to announce detailed plans but he has indicated that the real economy rather than the deficit is his priority. The senior Conservatives Sajid Javid and Stephen Crabb have advocated substantial increases in public-sector infrastructure investment, noting how cheap it is for the government to borrow. The argument that Osborne and the Conservatives had been making since 2010 – that the priority for macroeconomic policy had to be to reduce the government’s budget deficit – seems to have been brushed aside.

Is there a good economic reason why Brexit in particular should require abandoning austerity economics? I would argue that the Tory obsession with the budget deficit has had very little to do with economics for the past four or five years. Instead, it has been a political ruse with two intentions: to help win elections and to reduce the size of the state. That Britain’s macroeconomic policy was dictated by politics rather than economics was a precursor for the Brexit vote. However, austerity had already begun to reach its political sell-by date, and Brexit marks its end.

To understand why austerity today is opposed by nearly all economists, and to grasp the partial nature of any Conservative rethink, it is important to know why it began and how it evolved. By 2010 the biggest recession since the Second World War had led to rapid increases in government budget deficits around the world. It is inevitable that deficits (the difference between government spending and tax receipts) increase in a recession, because taxes fall as incomes fall, but government spending rises further because benefit payments increase with rising unemployment. We experienced record deficits in 2010 simply because the recession was unusually severe.

In 2009 governments had raised spending and cut taxes in an effort to moderate the recession. This was done because the macroeconomic stabilisation tool of choice, nominal short-term interest rates, had become impotent once these rates hit their lower bound near zero. Keynes described the same situation in the 1930s as a liquidity trap, but most economists today use a more straightforward description: the problem of the zero lower bound (ZLB). Cutting rates below this lower bound might not stimulate demand because people could avoid them by holding cash. The textbook response to the problem is to use fiscal policy to stimulate the economy, which involves raising spending and cutting taxes. Most studies suggest that the recession would have been even worse without this expansionary fiscal policy in 2009.

Fiscal stimulus changed to fiscal contraction, more popularly known as austerity, in most of the major economies in 2010, but the reasons for this change varied from country to country. George Osborne used three different arguments to justify substantial spending cuts and tax increases before and after the coalition government was formed. The first was that unconventional monetary policy (quantitative easing, or QE) could replace the role of lower interest rates in stimulating the economy. As QE was completely untested, this was wishful thinking: the Bank of England was bound to act cautiously, because it had no idea what impact QE would have. The second was that a fiscal policy contraction would in fact expand the economy because it would inspire consumer and business confidence. This idea, disputed by most economists at the time, has now lost all credibility.

***

The third reason for trying to cut the deficit was that the financial markets would not buy government debt without it. At first, this rationale seemed to be confirmed by events as the eurozone crisis developed, and so it became the main justification for the policy. However, by 2012 it was becoming clear to many economists that the debt crisis in Ireland, Portugal and Spain was peculiar to the eurozone, and in particular to the failure of the European Central Bank (ECB) to act as a lender of last resort, buying government debt when the market failed to.

In September 2012 the ECB changed its policy and the eurozone crisis beyond Greece came to an end. This was the main reason why renewed problems in Greece last year did not lead to any contagion in the markets. Yet it is not something that the ECB will admit, because it places responsibility for the crisis at its door.

By 2012 two other things had also become clear to economists. First, governments outside the eurozone were having no problems selling their debt, as interest rates on this reached record lows. There was an obvious reason why this should be so: with central banks buying large quantities of government debt as a result of QE, there was absolutely no chance that governments would default. Nor have I ever seen any evidence that there was any likelihood of a UK debt funding crisis in 2010, beyond the irrelevant warnings of those “close to the markets”. Second, the austerity policy had done considerable harm. In macroeconomic terms the recovery from recession had been derailed. With the help of analysis from the Office for Budget Responsibility, I calculated that the GDP lost as a result of austerity implied an average cost for each UK household of at least £4,000.

Following these events, the number of academic economists who supported austerity became very small (they had always been a minority). How much of the UK deficit was cyclical or structural was irrelevant: at the ZLB, fiscal policy should stimulate, and the deficit should be dealt with once the recession was over.

Yet you would not know this from the public debate. Osborne continued to insist that deficit reduction be a priority, and his belief seemed to have become hard-wired into nearly all media discussion. So perverse was this for standard macroeconomics that I christened it “mediamacro”: the reduction of macroeconomics to the logic of household finance. Even parts of the Labour Party seemed to be succumbing to a mediamacro view, until the fiscal credibility rule introduced in March by the shadow chancellor, John McDonnell. (This included an explicit knockout from the deficit target if interest rates hit the ZLB, allowing fiscal policy to focus on recovering from recession.)

It is obvious why a focus on the deficit was politically attractive for Osborne. After 2010 the coalition government adopted the mantra that the deficit had been caused by the previous Labour government’s profligacy, even though it was almost entirely a consequence of the recession. The Tories were “clearing up the mess Labour left”, and so austerity could be blamed on their predecessors. Labour foolishly decided not to challenge this myth, and so it became what could be termed a “politicised truth”. It allowed the media to say that Osborne was more competent at running the economy than his predecessors. Much of the public, hearing only mediamacro, agreed.

An obsession with cutting the deficit was attractive to the Tories, as it helped them to appear competent. It also enabled them to achieve their ideological goal of shrinking the state. I have described this elsewhere as “deficit deceit”: using manufactured fear about the deficit to achieve otherwise unpopular reductions in public spending.

The UK recovery from the 2008/2009 recession was the weakest on record. Although employment showed strong growth from 2013, this may have owed much to an unprecedented decline in real wages and stagnant productivity growth. By the main metrics by which economists judge the success of an economy, the period of the coalition government looked very poor. Many economists tried to point this out during the 2015 election but they were largely ignored. When a survey of macroeconomists showed that most thought austerity had been harmful, the broadcast media found letters from business leaders supporting the Conservative position more newsworthy.

***

In my view, mediamacro and its focus on the deficit played an important role in winning the Conservatives the 2015 general election. I believe Osborne thought so, too, and so he ­decided to try to repeat his success. Although the level of government debt was close to being stabilised, he decided to embark on a further period of fiscal consolidation so that he could achieve a budget surplus.

Osborne’s austerity plans after 2015 were different from what happened in 2010 for a number of reasons. First, while 2010 austerity also occurred in the US and the eurozone, 2015 austerity was largely a UK affair. Second, by 2015 the Bank of England had decided that interest rates could go lower than their current level if need be. We are therefore no longer at the ZLB and, in theory, the impact of fiscal consolidation on demand could be offset by reducing interest rates, as long as no adverse shocks hit the economy. The argument against fiscal consolidation was rather that it increased the vulnerability of the economy if a negative shock occurred. As we have seen, Brexit is just this kind of shock.

In this respect, abandoning Osborne’s surplus target makes sense. However, there were many other strong arguments against going for surplus. The strongest of these was the case for additional public-sector investment at a time when interest rates were extremely low. Osborne loved appearing in the media wearing a hard hat and talked the talk on investment, but in reality his fiscal plans involved a steadily decreasing share of public investment in GDP. Labour’s fiscal rules, like those of the coalition government, have targeted the deficit excluding public investment, precisely so that investment could increase when the circumstances were right. In 2015 the circumstances were as right as they can be. The Organisation for Economic Co-operation and Development, the International Monetary Fund and pretty well every economist agreed.

Brexit only reinforces this argument. Yet Brexit will also almost certainly worsen the deficit. This is why the recent acceptance by the Tories that public-sector investment should rise is significant. They may have ­decided that they have got all they could hope to achieve from deficit deceit, and that now is the time to focus on the real needs of the economy, given the short- and medium-term drag on growth caused by Brexit.

It is also worth noting that although the Conservatives have, in effect, disowned Osborne’s 2015 austerity, they still insist their 2010 policy was correct. This partial change of heart is little comfort to those of us who have been arguing against austerity for the past six years. In 2015 the Conservatives persuaded voters that electing Ed Miliband as prime minister and Ed Balls as chancellor was taking a big risk with the economy. What it would have meant, in fact, is that we would already be getting the public investment the Conservatives are now calling for, and we would have avoided both the uncertainty before the EU referendum and Brexit itself.

Many economists before the 2015 election said the same thing, but they made no impact on mediamacro. The number of economists who supported Osborne’s new fiscal charter was vanishingly small but it seemed to matter not one bit. This suggests that if a leading political party wants to ignore mainstream economics and academic economists in favour of simplistic ideas, it can get away with doing so.

As I wrote in March, the failure of debate made me very concerned about the outcome of the EU referendum. Economists were as united as they ever are that Brexit would involve significant economic costs, and the scale of these costs is probably greater than the average loss due to austerity, simply because they are repeated year after year. Yet our warnings were easily deflected with the slogan “Project Fear”, borrowed from the SNP’s nickname for the No campaign in the 2014 Scottish referendum.

It remains unclear whether economists’ warnings were ignored because they were never heard fully or because they were not trusted, but in either case economics as a profession needs to think seriously about what it can do to make itself more relevant. We do not want economics in the UK to change from being called the dismal science to becoming the “I told you so” science.

Some things will not change following the Brexit vote. Mediamacro will go on obsessing about the deficit, and the Conservatives will go on wanting to cut many parts of government expenditure so that they can cut taxes. But the signs are that deficit deceit, creating an imperative that budget deficits must be cut as a pretext for reducing the size of the state, has come to an end in the UK. It will go down in history as probably the most costly macroeconomic policy mistake since the 1930s, causing a great deal of misery to many people’s lives.

Simon Wren-Lewis is a professor of economic policy at the Blavatnik School of Government, University of Oxford. He blogs at: mainlymacro.blogspot.com

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

This article first appeared in the 21 July 2016 issue of the New Statesman, The English Revolt