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

The overall effect
11.27 The model shows that in the consumer sphere, the main effect of our changes
would be to increase compliance with FSA requirements and FOS guidance. At
present, firms may fail to comply with FOS standards either because they do not
understand what is required, or because consumers will only rarely challenge
their decisions. We think that a new Insurance Contracts Act would address both
problems: insurers will understand the rules better, and consumers will find it
easier to seek advice about their rights. Thus there will be less non-compliance,
and more claims paid.
11.28 Table 18 of the report shows the provisional aggregate static economic impact of
the proposed reforms on the critical illness insurance market. 11 The report
assumes that both Type 1 and Type 2 firms would be able to offset the increased
costs of claims and administration against an increased premium charged to
customers. This means that the impact on insurers would be minimal. 12 Both the
costs and the benefits would fall on consumers as a whole. For Type 1 firms,
London Economics have calculated that the costs would translate into a mere
£3.04 increase per policy. For Type 2 firms, however, the impact would be
considerable. At present Type 2 firms are assumed to avoid all policies for nondisclosure
or misrepresentation. After our reforms, they will need to pay all claims
where there has been innocent non-disclosure or misrepresentation. They will
also need to apply a proportionate remedy to those claims where there has been
negligent misrepresentation. Therefore their claims costs will increase
dramatically. If it is assumed that these costs are passed on to consumers,
London Economics have calculated that this will translate into an increase of
£212.03 per policy. It is most unlikely that any consumer would pay this increase
and therefore Type 2 firms would either go out of business or have to convert into
Type 1 firms.
11.29 The beneficiaries of the reforms, as shown in Table 18, are honest consumers
who previously would have had their claims wrongly turned down. Honest
consumers are shown to be £9.855 million better off. Those consumers who
make deliberate or reckless misrepresentations will be £1.321 million worse off.
11.30 Overall, London Economics estimate that the aggregate benefit to the critical
illness market of our reforms would be £0.861 million to £1.120 million per
annum. This covers the impact across all firms, consumers and the wider
economic impact. 13
11 Appendix B, p 56 below.
12 The Table suggests that Type 1 firms will be between £0 and £0.241 million better off as a
result of our reforms, while Type 2 firms will be between £0 and £0.016 million better off.
This reflects the uncertainty over administrative costs. The Table assumes that
administration costs will fall within a range and that costs at the highest point of that range
are all passed to consumers in increased premiums. This leads to firms being “better off” if
administration costs are less than the highest point of the estimated range.
13
For example, it is estimated that after the reforms, fewer cases will go to the FOS meaning
that the costs for the FOS will reduce.
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