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

Section 6 Case Study - Critical Illness Cover
6.2.5 One-off administration costs
There will be one-off increased costs to all types of firms associated with the
necessity to provide clearer and more transparent forms. Insurance firms do
generally update these forms on an ongoing basis and the costs associated
with this item would not be expected to be significant. However, as with any
change in legislation, there are costs associated with the time and effort
required to familiarise oneself with new legal frameworks and it would be
unreasonable to assume that this is negligible. On the other hand, there are
also considerable costs currently involved in trying to understand the
confusing overlapping systems of law, regulation and Ombudsman practice.
The reforms would remove these costs.
It is therefore difficult to estimate either a cost or a benefit associated with this
item in monetary terms.
However, we have assumed that the one-off costs associated with the
production of new forms and general administration are equivalent to 2% of
the total current premium for Type 1 firms (assumed to be £244.58 per
annum) and 5% for Type 2 firms (assumed to be £232.35 per annum), then the
one-off additional administration costs are £2.329 million for Type 1 firms 33
and £0.416 million for Type 2 firms – making a total across all firms of £2.745
million. This equates to approximately £4.89 per policy for Type 1 firms and
£11.61 per policy for Type 2 firms.
We would welcome information from consultees on this point.
6.2.6 Recurrent administration costs
In addition to these one-off costs, insurance companies may take additional
steps at a pre-contractual stage to gather information on potential insureds.
This is potentially costly and firms will make a commercial decision when to
undertake these searching costs. As this is a commercial decision, we have
assumed that firms only undertake these tasks in the case of high value
policies (£400,000 or greater) and have assumed that only 0.5% of policies are
above this threshold level.
The estimates of these pre-administration costs need to be treated with
caution. In the discussions we have had with various organisations, there has
been no consensus even on whether there would be any additional
administration costs let alone the level that they might be. We think that
assuming that there are no ongoing administration costs may be unrealistic
and any change in policy is likely to be associated with at least some
administration costs. We have therefore included an item to cover these costs
though additional information that might result from the consultation
exercise would be particularly helpful in this aspect.
33 For Type 1 firms this is calculated as follows: 476,145 * 0.02 * £244.58 = £2,329,110
London Economics
June 2007 49