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Is the insurance industry broken?

Updated on February 17, 2011

The simple answer, in my view, is "Yes".

Insurance, in monetary terms, goes back to 1750BC according to Wikipedia: "The Babylonians developed a system which was recorded in the famous Code of Hammurabi, c. 1750 BC, and practiced by early Mediterranean sailing merchants. If a merchant received a loan to fund his shipment, he would pay the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen". For a full history of insurance, go to: http://en.wikipedia.org/wiki/History_of_insurance .

The key point is that insurance was designed for the protection of the insured person, paying a fee to an insurer to ensure that, in the event of a disaster, your personal loss would be reduced, or minimised.

In the modern western world, we now have literally thousands of insurance companies, but most of them seem to have lost the ethos of insurance, and are simply money-making businesses, who go out of their way to avoid paying out on claims, to maximise their profits. They need to resort to this practise, because they compete almost solely on price.

Thus, they all offer very similar policies, with similar benefits, similar exclusions, similar rules for who they will and will not insure, and for how the insurance premiums are worked out, and then they compete to offer the very lowest prices. This inevitably leaves them working at potentially very low margins, so they need to boost the margins by trying to avoid paying out for claims.

Are you aware that, with most car insurance policies these days, if you receive a standard three-point speeding offence and do not tell your insurance company straight away, and then you have an accident, the insurer is likely to deem you "uninsured" and refuse to pay out, because you have not complied with the small print terms of your policy? (Get your policy out now and read the small print - you might get a shock)! They will also probably cancel your policy, leaving you with a bill for the repairs, and with no insurance, so you cannot drive your car again until you have re-insured it.

Now, having had your policy cancelled by an insurer, you will find it almost impossible to get insured again. All the companies use the same tick-box assessment system, and as soon as you tick the "Yes" box against the question: "Have you ever had an insurance policy cancelled?" then they will automatically refuse to insure you, apparently labelling you automatically as some kind of fraudster, even though, in general, reasons for cancellation of a policy will vary, and policies may be cancelled for no fault of the insured. An example of this would be where an underwriter only insures people with up to three points on their license. If you then get another three points, and inform your insurer, they will have no choice but to cancel your policy.

This has happened to me (I didn't have an accident, but went over their points limit, and they cancelled my policy), and a very unfortunate occurrence has happened to a friend of mine who had an accident, and was then told by her insurer that she was uninsured. She had picked up three new points, but three points had also expired, so she thought there was no change in the overall number of points since her renewal, so no need to tell the insurers until the next renewal. That was an expensive assumption!   £5000 of repair work later, she then had the very difficult and time-consuming task of finding an insurer who would insure her, as she had had a policy cancelled, and was therefore automatically rejected by most insurers.

If you do eventually find an insurer who will insure you despite having had a policy cancelled, then you will find that your premium has roughly doubled from the previous one, or maybe worse . My friend had to pay £4000 to get insured again.

Sorry tales do not just apply to car insurance. I had taken out holiday insurance and my skiing gloves were stolen. I had to buy new ones in the resort to continue skiing.  "Never mind", I thought, "at least I had insurance, and that will cover the cost of the new gloves, when I return home, and put in a claim - that's why I took out insurance, after all".

Well, firstly, upon reading the claims information, I discovered that because I had not reported the loss to a police station within 24 hours, by turning up at a station to report the crime, and got a police certificate to say that I had reported it, the insurance company would not process any claim. After arguing the point, explaining that the nearest police station was an hour's drive away from the ski resort I was in, and I had no transport, so it was impractical to get there and back without incurring huge additional costs, and missing a large chunk of a skiing day, they agreed to process the claim.

However, they now refused to pay out because "I had not kept the property close enough by me at all times to ensure that it was not stolen". This clever little oxymoron in the small print technically enables the insurer never to have to pay out, since if an item has been stolen, then by definition you cannot have been close enough to it to prevent it from being stolen, unless it was physically forced out of your grasp, or you were threatened with violence if you did not hand it over.

Having suggested that we discussed this term of their policy with the insurance ombudsman, they agreed to pay out.

Then, I discovered that I had omitted to tick the "pay extra to waive the excess" box, and thus had a £50 excess on all claims. Therefore, the payment I received for my £52.50 ski gloves which had been stolen, and which I had taken out travel insurance to ensure that I would be compensated for in just such a scenario, was a meagre £2.50. Case closed. What with the costs of letters to the insurance company, and postage stamps, not to mention my time, the travel insurance proved to be a complete waste of money.

Having done some further research, I discover that I am not alone in my experience, and the insurance industry really is broken, in that it no longer fulfils its purpose, which is to compensate people for their losses in return for a pre-payment having been made. In practise, many, and probably most, modern day insurers try every trick they can to find a reason not to pay out.

Part of the problem, I believe, is the growth of price comparison websites. They firstly make all insurers work out their premiums through exactly the same process - exactly the same questions asked. They necessarily have tick-box responses, rather than human intervention which could make value judgements, and then they give very easy comparisons to consumers of the prices.

This forces the insurers all to compete purely on price - they cannot ask different questions, or assess the risks in a different way, as the comparison website software won't allow them to.

Of course, everyone knows someone who knows someone who has made a fraudulent claim, or exaggerated their losses to claim more, and this practise obviously makes insurers more careful about "just paying out", and rightly so. However, it seems to have gone to the extreme, where you are either considered automatically to be making a fraudulent claim unless you have absolute and undeniable proof to the contrary, or insurers are simply, as a policy, trying to avoid paying out wherever possible, in order to make up the profits that they have lost out on by competing purely on price.

I'm not an insurance expert, just an insurance customer, so I'm not going to make recommendations, but it would seem to me to make some sense to avoid the insurers who are represented on comparison websites, and spend your money with an insurer who makes claims about good service, and what benefits you get. You may pay more for your insurance, but at least you are more likely to get paid when you make a claim. Above all, read the small print thoroughly before you make a decision on who to buy from. And with travel insurance, it may not be worth insuring yourself at all for loss of personal possessions, just get the minimum deal on cancellation, curtailment, etc. to provide compensation if there is a big disaster, and self-cover for small items (i.e. take it on the chin if ski gloves, or similar, are stolen).

It is my belief that there is a massive hole in the insurance market now for someone to come along with a radical new way of assessing risk, where they also assume that claims are real and accurate as a starting point, and aim to settle in full.

The assessment of risk is a very big issue, and obviously key to what insurers do, but it seems that they are currently extremely risk averse, making it hard for anyone who does not have a totally "blameless" record to get insurance, and the assessment is reduced to a very limited set of criteria, which have not necessarily been very well thought through. There also seems to be only a short-term assessment of risk.

For example, if you have never made a claim in 25 years of driving, but now have 9 points on your license for speeding, then you are considered a high risk. However, if you have had 15 claims in 25 years, but none for the last 5 years, and currently have a clean license, then you are considered a low risk. Is this a reasonable assessment? Bearing in mind the ubiquity of speed cameras, often on roads with artificially low speed limits imposed after the speed cameras were introduced (e.g. dual-carriageways with motorway-style slip roads which have 30mph or 40mph limits imposed, even though they had 70mph speed limits for 40 years previously), it is easy to pick up points for speeding whilst driving safely, and thus the first driver above could well be a much lower risk to insure than the second driver. However, no one in the insurance industry will make that assessment. What if a new insurance company came along which could make such an assessment? I think they could do very well.

As a real example of this, another friend works in the airline industry and lives abroad (near an airport), but works in the UK. He flies in to Heathrow, where he keeps a car, bought in the UK, taxed in the UK, and insured in the UK. However, he finds it extremely hard to get insurance, because once he has answered the question "Are you resident in the UK?" by ticking the "No" box, most insurers will not touch him, or they charge excessive premiums. Now, for a car that is not an expensive car, is not driven that frequently, and usually not very far when it is, with a driver who has a clean license, where is the risk for the insurer? Insurers should be falling over themselves to insure him at a cheap premium, but they are doing the opposite.

This is another reason why I believe the industry is broken. The insurers have got their business models all wrong, and they are providing an appalling service to their customers by trying to avoid paying out in full wherever possible.

I would be very interested to receive comments on this from people working in the insurance industry, especially those in charge of assessing risk, deciding how premiums are calculated, and those in sales and marketing who get what I'm saying and feel a light go on as to how they could differentiate themselves in the very crowded market, browbeaten into competing only on price.

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