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Changing the relationship between consumers and insurance providers

Houses of Parliament, Big Ben
Many consumers and consumer groups accuse insurance companies of living in the past, with reluctance to embrace change. So it will surprise few people that the basis of much insurance law dates back to a 1906 act on marine insurance.


But all that is about to change, and for once, insurers and their trade bodies do not have to be dragged screaming and shouting into a change. Although there are always a few moaning minnies who see no reason to change, most accept that a legal basis that was effectively between small insurance underwriting groups and often larger shipowners, is nonsense in a world where there is huge inequality in power between global insurance groups and individual customers.


The government has introduced the Consumer Insurance (Disclosure and Representations) Bill, which aims to radically change the relationship between consumers and insurance providers. When law, it will give certainty to consumers and insurers by shifting the emphasis away from a consumer’s duty to disclose all necessary information, to a requirement for insurers to ask particular questions and obtain specific information about their customers, before they issue an insurance policy.


The Law Commission and Scottish Law Commission conducted a joint review of insurance contract law for England, Wales and Scotland. The reason for the review is that the law and insurance practice have fallen out of step. The law is based on outdated paper based methods and takes no account of electronic commerce. More worryingly, it often contrasts badly with current consumer and contract law.


The two commissions recommended new legislation covering the issue of what a consumer should tell their insurer before taking out insurance. Under the Marine Insurance Act 1906, the consumer has a duty of disclosure when completing any insurance proposal form. The current law requires consumers to volunteer information about everything that a prudent insurer would consider relevant.  They recommend that this duty should be abolished, as consumers are not able to second guess what factors the insurer will take into account when accepting a risk, and can therefore easily slip up on disclosure.  Instead, insurers should be required to ask questions about what they want to know.


The commissions identified four key problems with the 1906 act:


  • The duty to disclose may operate as a trap for customers who are usually unaware that the duty exists

  • Customers may be denied claims even when they have acted honestly and reasonably

  • The remedy can be overly harsh. If a customer has made a mistake then the insurer is entitled to refute all claims, even those that would have been paid if given full information

  • Proposal forms often state that answers form the basis of the contract. So if any statement is incorrect, the insurer can refuse all claims, however insignificant the error.


There is as yet no date for the law but it will change what every insurer asks .No longer will they be able to get away with asking a few questions and assuming that customers will also tell them anything relevant –with legal protection that the insurer can retrospectively decide what was or what was not relevant in information they were not told.


So will this mean long proposal forms? Some health insurers may go that way but there are simpler ways to deal with even health insurance questions. Most will probably use a method that home and car insurance schemes of banks have found workable- customers just have to tick a box that they have not had any claims, had no health problems etc. This makes underwriting very much more black and white – you either get accepted at standard rates –or declined. This also means anyone with a health history or health problem, will increasingly be driven to specialist markets that can offer a range of non-standard underwriters


Effectively, health and life insurance will be as commoditized as home and car insurance, which will make it easier for consumers to compare price and cover. It may also end the irritating practice of product development where insurers keep  adding ‘bells and whistles’ – lots of add-ons that are not really relevant to the product and are often barely used to give them star ratings on trade comparison sites that rate products by volume of features rather than price or value for money.
Health insurance hot topic: May 2011