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

Section 5 Identification of the potential impact of the reforms
5 Identification of the potential impact of
the reforms
5.1.1 Analytical Framework
In this section, we present a high level assessment of the possible economic
impact of the proposed reforms relating to non-disclosure and
misrepresentation in the consumer market. We adopt a standard options
appraisal framework as outlined in HM Treasury Green Book and present the
various characteristics of the market depending on whether they are inputs,
processes, outputs or outcomes. We have presented our understanding of the
analytical framework in Table 15 overleaf.
This analytical framework and the case study in the following section of
report focus on the proposed changes outlined in section 2 of this report. We
acknowledge that there are likely to be some impacts associated with other
reforms recommended by the Law Commission but these are not considered
in this report. We would appreciate the views of consultees on the validity of
the framework for analysis, as well as a likely impact of these proposed
reforms.
In theory, the inputs to the appraisal framework relate to the characteristics of
the various insurance markets. These characteristics relate to both the types of
firms and policies sold but also to the current legislation in relation to nondisclosure
and misrepresentation, as well as the current behaviour of firms
and consumers in the marketplace.
We have characterised the insurance markets according to the potential types
of firms operating in the market – though this clearly abstracts substantially
from the situation in reality. We have assumed that there are two types of
firm operating in each insurance market – Type 1 firms generally attempt to
replicate the decisions that have been made by the FOS and Type 2 firms in
general do not replicate the decisions made by the FOS and apply a strict
interpretation of the current legislation in respect of non-disclosure and
misrepresentation.
There is no clear delineation between Type 1 and Type 2 firms and the
modeling exercise presented in the next section is based on an assumption
relating to that particular market. It is clear that there is overlap between the
two types of firm with some Type 1 firms occasionally applying the current
legislation to non-disclosure and misrepresentation rigorously and vice versa;
however, any alternative characterisation of the market would be overly
complex and difficult to appraise.
London Economics
June 2007 32