The insurance “add-on” product market is apparently worth £4 billion a year.
And the FCA, the regulator for financial services, says that consumers are “simply not getting value for money”.
Mind you, Simon Burtwell the head of UK general insurance at Ernst & Young is reported as saying that rate rises would be good for the industry long-term because “currently there is a general trend of consumers paying too little for their insurance products”.
I’m not bad at maths, so I can see a wee bit of a conundrum there.
An expert says that people are paying too little, while the regulator says they aren’t getting value for money – which by implication means that they are paying too much.”
Probably, both are, but they are, like “experts” the world over, talking about different things.
Insurance isn’t particularly complicated, in principle. Basically, an insurer works out the odds of something happening, works out how much they will have to pay if it happens, and multiplies one by the other. That’s the “pure premium”. They then add a bit for admin and profit, and that’s the premium.
Insurance people don’t like it (I know, I was one, I’m still qualified as an Associate of the Chartered Insurance Institute), but it’s very much like being a bookie. Turf Accountant’s (as bookies prefer to be known) do much the same, the point being to be in profit whichever horse wins the race or whichever house is flooded etc.
It’s the same principle with “add ons” like extended warrantees. If a shop (or insurer) is going to offer one, they work out the odds of the warranty being claimed on (the fridge or whatever packs up), what they have to pay if it does, multiply the two together and add admin and profit, and that’s the premium.
Except usually the profit margin is huge compared to the pure premium.
So the FCA are probably comparing costs to other types of insurance (which are still potentially expensive, but closer to the actual pure premium) and the insurance companies are comparing them to the sort of margins that they’d like to get on all their business, and have traditionally got on add-on contracts.
You can understand the attitude of EY and insurers. They are businesses, they’re trying to make money.
You can also understand the attitude of the FCA, they are trying to “protect” the public.
But what’s tricky is how the FCA go about it. They say “there’s a clear case for us to intervene…..Firms must start putting consumers first and stop seeing them as pound signs”.
So what the FCA wants is for businesses not to operate like businesses, but to operate like regulators who are supposed to look after the public.
What they’d be better off doing is educating the public.
And they could do that by buying Taming the Pound for everybody – or at least circulating and promoting the “quick reference” sheet at the end of the chapter on insurance!
If people followed these few principles, they wouldn’t end up with expensive add-on policies – so if you are interested in getting “value for money”, you’re best off ignoring the “experts” and the regulators and remembering:
- Insurance is to cover calamity, not inconvenience.
- The insurer will charge the “pure premium” plus admin costs and profit, so you can’t “win” on insurance.
- Do the maths. See if you should “self insure”. Insure stuff that would be a calamity, not (usually) an inconvenience.
- Do things to reduce premiums, fit locks, smoke detectors, etc. and look at the excess on the policy.
- Work out what you want and need and buy that; don’t buy what they want to sell.
- Protection, like life assurance and PHI should at least be considered if you have dependants or anybody who will suffer financially (or if you’d have big problems paying your bills if you were ill or injured).
- Extended warranties are usually a waste of money.
- But as with everything else, do the maths (or hire somebody independent to do it for you).