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

Section 5 Identification of the potential impact of the reforms
The slight change in the definition of reckless/inadvertent/negligent claims
means that there is the possibility that there will be an increase in the number
of claims paid relating to negligent misrepresentation and a change in the
average size of claims paid due to the introduction of the principle of
proportionality in relation to these types of claims. It is likely that the small
increase in the number of claims paid will slightly increase the average
premium paid by consumers all other things being equal and the current
subsidisation of some consumers will cease (or diminish).
The proposed changes to the legislation will have a greater effect on Type 2
firms compared to Type 1 firms.
In terms of the number of claims and eventual payouts, it is probable that
Type 2 firms will have to pay more claims where there has been nondisclosure,
or innocent or negligent misrepresentation, as Type 2 firms
(according to our definition) currently avoid policies for these reasons.
However, it is likely that rather than the ‘all or nothing’ payouts currently
being made, a number may result in proportionate payouts. Therefore, it
might be the case that the average size of each claim paid will decrease,
though the total monetary value of all claims paid may increase. The
aggregate impact of the proposed changed will increase the average
premiums paid by consumers currently purchasing insurance policies from
these (Type 2) firms.
In the analytical framework presented, we have assumed that consumers of
these firms may also be more price-sensitive than consumers of Type 1 firms.
As we have assumed that the policies of Type 2 are on average 5% cheaper
than the policies of Type 1 firms, if there is an increase in the price of Type 2
firms’ policies then there is likely to be a greater reduction in the quantity of
insurance demanded from Type 2 firms compared to Type 1 firms.
We think that the proposed changes to the legislation will disproportionately
affect the premiums charged by Type 2 firms. These firms will see a reduction
in their current unit cost advantage and there is likely to be some degree of
customer migration away from Type 2 firms to Type 1 firms. This may result
in some Type 2 firms reacting by either operating less profitably, exiting the
marketplace altogether or fundamentally altering their behaviour or business
model and essentially converting themselves into Type 1 firms (if considered
a more profitable long terms strategy).
We would appreciate the views of consultees on the validity of these expected
impacts on firms.
Clarity of Questionnaires
As previously mentioned, insurance companies will not be allowed to avoid a
policy for reasons of non-disclosure. Insurers will be expected to ask
questions about any matter that is material to them. It is therefore likely that
the questionnaires administered by all organisations will have to be amended
with an increased onus on clarity and transparency.
London Economics
June 2007 36