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

Section 6 Case Study - Critical Illness Cover
We assume that following the proposed changes to legislation (for Type 1
firms) 85.5% of cases involve a situation where a claim is refused for reasons
of reckless or deliberate misrepresentation and premiums are retained. The
equivalent rate for Type 2 firms is 56.5%. The average term of a policy when a
claim is brought is approximately 39 months. Therefore the average premium
that will be retained by Type 1 firms stands at £795 30 (£755 for Type 2 firms).
This implies that insurance companies will retain approximately £1,321,170 in
premiums (£1,111,242 for Type 1 firms and £209,928 for Type 2 firms 31).
Combining the increase in premiums resulting from the increased likelihood
of paying a claim and offsetting this against the retained premiums in the
case of deliberate and reckless misrepresentation, this equates to an increase
in premiums charged by Type 1 firms of approximately £2.04 per annum and
£211.07 per annum for Type 2 consumers 32.
6.2.4 Training
These proposals have clear implications for the training undertaken by
insurance firms. There is likely to be greater clarity and transparency in the
future and training is likely to be more straightforward than may currently be
the case.
However, there will be some additional training costs associated with
retraining existing call handlers to operate under the current proposals. In
addition, the fact that the current proposals will not apply retrospectively
imply that there may be different assessment regimes operating depending
on when the policy was first taken out by the consumer. This will certainly
add to the cost of claims assessment in the short run, however, given the fact
that most policies are renewed annually, the dual system is only likely to be
in existence in the very short term.
We have been unable to assess accurately the economic impact of the change
in the way in which claims are handled, but we would assume that the costs
are not significantly different from zero.
We would welcome any clarification or information from consultees on this
point.
30 For Type 1 firms this is calculated as follows: £27.92*39*(0.73)=£794.88
31 Following the proposed reforms, we assume that there are 1,398 claims against Type 1 firms that are
considered deliberate or reckless. The premium retained equals 1,398*(£794.88)= £1,111,242
32 This does not incorporate the impact of increased recurrent administration costs, which are considered
later in the report.
London Economics
June 2007 48