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

Section 3 Economic incentives in insurance markets
In Scenario 1, the remedy available to the insurer might be to allow the
insurance company to charge the full premium they would have charged had
they known the individual was suffering from high blood pressure. This is
neither the current law, nor a proposal for reform suggested by the Law
Commission, but it illustrates one type of proportional remedy. Even in the
case where the insurer is able to charge the full premium that the insured
should have paid, this remedy is only available against those individuals who
have made the claim and not the entire pool of individuals that have
misrepresented. Therefore, this option only reduces the economic loss
suffered by the insurer by £400, leaving the insurer with a total expected loss
of £9,600.
Number of policies
written
Premium actually
charged
Income from pool of
policies
Expected number of
claims
Table 2: Illustrative workings of an insurance market with
misrepresentation under scenario 1
1. Standard
policy
2a. Those who
have declared
high blood
pressure
2b. Those who
should have declared
high blood pressure
but misrepresented
their condition.
800 150 50
£200 £400 £200
£160,000 £60,000 £10,000
2% = 16 4% = 6 2% = 1
Actual number of claims 2% = 16 4% = 6 4% = 2
Cost per claim £10,000 £10,000 £10,000
Cost of claims for pool £160,000 £60,000 £20,000
Initial effect £0 £0 -£10,000
Additional Premiums £400
Overall effect £0 £0 -£9,600
London Economics
June 2007 10