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

Section 4 Baseline analysis of insurance markets and the extent of non-disclosure
4.3.2 How does the FOS classify the consumer’s
behaviour where a critical illness claim is declined?
Out of the 93 critical illness final decisions in the Law Commission’s survey,
the issue of the consumer’s behaviour was relevant in 76 of them.
Ombudsmen classified the consumer’s behaviour as follows:
Table 12: Critical Illness non-disclosure and misrepresentation cases:
classification of outcomes
Number %
Innocent: consumer wins 17 22
Inadvertent: proportionate remedy
applied
8 11
Reckless or deliberate: policy avoided 16 21
Ombudsman does not classify, but policy
nonetheless avoided
35 46
Total 76 100
4.4 Elasticity of Demand
In this section, we provide some information on the elasticity of demand 8
associated with each type of insurance in the retail market. We provide this
information because it is possible that the change in the proposals suggested
by the Law Commission may result in some increase in costs to insurers 9 that
will in turn result in a reduction in the quantity of insurance demanded by
consumers. The elasticity of demand provides an estimate of how sensitive
changes in the price of a product are to changes in the quantity demanded of
that product.
8 The price elasticity of demand measures the percentage change in quantity demanded following a
percentage change in the price of a good. For instance, if there is a 10% increase in the price of a good
that results in a less than proportionate reduction in the quantity demanded of that good, then the
good in question is described as inelastic. If the change in quantity demanded is greater (in
proportionate terms) than the initial change in price, then the good is defined as being elastic. The
change in the quantity demanded is made up of two elements - the substitution effect and the income
effect. The substitution effect is always negative following an increase in price – and reflects the fact
that the good in question is worse value for money than used to be the case. The income effect reflects
the change in demand for the good at every price resulting from the erosion of purchasing power
following the increase in prices. For ‘normal’ goods, the income effect reinforces the substitution effect
while for ‘inferior’ goods, the income and substitution effects operate in different directions
9 Extreme changes to the legislation may mean that certain forms of insurance become too expensive for
insurers to offer. The Law Commission does not propose extreme changes.
London Economics
June 2007 27