IAG (Insurance) used keyloggers to investigate productivity of remote worker

I think it's OK for a company to do this, as long as two conditions are met: that the device and software are owned by the company, and that the company clearly publishes what means they use to monitor employees in this way.

I suppose that publishing their methods may enable employees to game the system, but if you've gotten to that point, I suppose you have bigger fish to fry.

It is not clear from the article whether the keylogger was logging the content of what workers typed, but it seems that the company was interested only in the rate at which they were typing.

It seems that the worker had suddenly run into mental health issues. I hope that her management would be understanding, that communication would happen on both sides of this, and if she needed any accommodations, or time off, or consideration, that she would've asked permission, rather than just sort of disappearing, but that's the nature of a mental health crisis.

Is there a kind or degree of monitoring that would be unacceptable for remote workers? What if they were working in the office?

It seems that this time, the keylogging and monitoring simply detected loafing or AFK behavior. I can think of many worse things that may be detected.