Misrepresentation, Non-Disclosure and Breach ... - Law Commission

11.12 The figures in the model should be treated with caution. Most are based on
assumptions and estimates. The figures are included to demonstrate the
workings of the model, not to provide an accurate assessment of the costs of our
proposed reform.
Type 1 and Type 2 firms
11.13 To analyse the effect of our proposals on the critical illness market, the report
divides insurance companies into Type 1 or Type 2 firms. Type 1 firms are
assumed to abide by FOS guidance and FSA regulations, and to have
institutionalised the requirements to treat customers fairly. On the other hand,
Type 2 firms are assumed to abide by the letter of the law and no more. Our
reforms would therefore have little impact on Type 1 firms whereas Type 2 firms
would be forced to change their practices dramatically. The model assumes most
firms are Type 1, though a few are Type 2.
11.14 In practice, we doubt that any insurers are either fully Type 1 or fully Type 2.
Even good insurers may occasionally make mistakes and it is unlikely that any
insurers ignore all FSA rules in this area. However, some insurers seem better
than others, and for analytical purposes it may be helpful to simplify reality in this
way. We have been told that Type 2 firms are more likely be “closed book” firms,
which are no longer selling policies and do not have a brand reputation to protect.
It is also possible that some smaller firms struggle to understand what the FOS
expects of them.
11.15 Despite the fact that no insurers are fully Type 1 or Type 2, analysing the effect of
the reforms on these two categories of firm will display a full range of the potential
economic effect of our reforms. Individual insurance companies will be able to
judge where they will fall within that spectrum.
11.16 We ask whether the economic analysis of our reforms should look
separately at firms that follow FSA rules and FOS practice (Type 1) and
those that follow the law (Type 2). We welcome views on the numbers and
type of firms that do not currently follow FOS practice.
The cost of claims
11.17 The model suggests that the impact of our proposals on Type 1 firms would be
relatively slight. These insurers will benefit from having the rules more clearly laid
out, and will be much less likely to be undercut by unscrupulous operators. For
the most part, however, their claims handling will be unaffected. They will
continue to follow the good practice expected by the FOS and codified in our
proposals.
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