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

Section 6 Case Study - Critical Illness Cover
6.1.5 Elasticity of demand
Given the relatively complex nature of the product being sold and the fact
that critical illness products are often sold as a tied product to mortgages, we
have assumed that the elasticity of demand associated with critical insurance
products is relatively low - in the region of -0.25. In other words, if the price
of critical insurance increases by 10% the quantity demanded of critical illness
insurance will fall by 2.5%. We also assume that the reduction in critical
illness insurance resulting from any increase in premiums occurs through
some individuals no longer purchasing policies rather than all individuals
marginally reducing the extent of their coverage.
6.1.6 Claims
There is no specific information on the number of critical illness claims
annually. However, we have estimated that the number of claims in the
critical illness market annually is 17,585. This is based on evidence from one
of the top 5 providers in the marketplace (accounting for just under 9% of
total sales) indicating that they received 1,500 claims in 2005 16.
Assuming that all firms in the marketplace have an equal likelihood of
receiving a claim, the total number of claims for the market as a whole is
estimated to be in the region of 17,585. This corresponds to approximately
3.4% of total policies sold annually.
6.1.7 Average Payouts
There is no market-wide information on the average payout in the critical
insurance market. However, data from one insurer within the top 5 providers
nationally indicates that their average payout was approximately £73,000. We
have assumed that this figure is representative of the market as a whole and
have assumed that there is no change in the average size of claims before and
after the proposed reforms.
6.1.8 Non-disclosure and misrepresentation
The likelihood of claims payment very much depends on the type of insurer.
From the specific company evidence available, the proportion of CIC claims
paid out ranges between 72% and 90%. The average proportion of claims paid
out is approximately 80% 17. For the later analysis, we have assumed that the
average likelihood of CIC claims payment (over the entire market) is 80%.
16 The actual market share of this provider is 8.53%. Therefore 1,500/(0.0853) = 17,585
17 This information is presented in Table 8 in Chapter 4. The actual percentage used in this analysis is
79.9%.
London Economics
June 2007 42