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

Section 3 Economic incentives in insurance markets
Table 3: Illustrative workings of an insurance market with
misrepresentation under scenario 2
Original number of policies
written
Number of policies written
remaining
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
800 150 48
Premium actually charged £200 £400 £200
Income from remaining pool
of policies
Expected number of claims
from remaining pool
£160,000 £60,000 £9,600
2% = 16 4% = 6 0
Number of claims 2% = 16 4% = 6 0
Cost per claim £10,000 £10,000 £10,000
Cost of claims for pool £160,000 £60,000 £0
Overall effect £0 £0 +£9,600
3.1.4 Scenario 3
Scenario 3 assumes that an insurer will be obliged to pay a proportion of the
claims, based on the premium that would have been charged had the insurer
been aware of the true state of affairs. In this scenario, the insurance company
only pays half of each claim (£5,000), on a proportionate basis. This remedy
attempts (as far as the law is able) to replicate the effect of the standard
policy, leading to a result under which the insurer makes no economic profit
or loss.
London Economics
June 2007 12