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

Section 6 Case Study - Critical Illness Cover
Some of the estimates are based on secondary data collected at household
level nationally; however, certain elements of the analysis are based on just a
few pieces of information, which may not reflect reality as accurately as we
would wish.
The worked example in this section is designed to provide an illustration of
some of the impacts that might be associated with these proposals. We would
also hope that it provides some rationale for the type and specificity of the
information that are necessary for a full cost benefit analysis.
6.4 Conclusions
We have attempted to provide an indication of the economic impact of the
Law Commission’s proposed reforms relating to non-disclosure and
misrepresentation on critical illness claims. There are significant data and
evidence gaps in the analysis and we have made a number of assumptions in
an attempt to fill these gaps. We would welcome any information resulting
from the consultation exercise to fill some of the gaps identified as part of this
research project.
We found that at an aggregate level, the proposed reforms are unlikely to
have a significant impact either on firms or consumers. However, there is
considerable variation in the impact of these proposals depending on the type
of firm or the type of consumer. Specifically, we have estimated that although
there will be a minimal impact on those firms that attempt to replicate the
decisions for the Financial Ombudsman Service, there may be a negative
impact on some of those firms that currently do not.
We have estimated that the proposed reforms will have a large positive
impact on consumers that are honest in the claims they bring to insurance
companies and will have a large negative impact on those consumers that
deliberately or recklessly misrepresent.
Specifically, we have estimated that there will be an increase in the number of
claims paid under these proposals and an increase in premiums charged to
cover those claims. Honest consumers will benefit from the proposals in the
sense their claims will now be more likely to be paid. All consumers will pay
a little more for their critical illness insurance to compensate for this fact.
There are additional costs and benefits associated with these proposals. These
relate to the increased one-off and on-going administration costs incurred by
Firms; a reduction in the necessity to have a complaint settled by the
Financial Ombudsman Service; and the general benefits associated with
regulation. The largest of these costs relate to the administration costs faced
by firms and this component of the analysis is the key determinant of the
relative costs and benefits associated with the Law Commission’s proposals.
London Economics
June 2007 57