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It’s not what goes into that counts; it’s what comes out

In various places and at various times we have seen calls to manage some of the components of what goes into the insurance you sell or buy. These are often motivated with the best of intentions – say consumer protection – yet are almost equally often wrong-headed, or in doing some good do some wrong.

Tuesday, September 20th 2011, 6:24AM

by Russell Hutchinson

As many a good insurance broker says "at claim time you will forget the premium and remember the sum insured". Similarly, we might equally say that it isn't what goes into your insurance that counts, it's what comes out of it.

We take, for example, good policy wordings as a good indicator of the insurer's intent to pay claims. They probably are.

At times, however, things change. Insurers are aware of this and try, at times, to convince you of an approach to paying claims which is intended to demonstrate their willingness to pay valid claims: they provide claims statistics, examples of claims paid, and make statements like "if in doubt, we pay out". 

At times the competition in policy wordings seems to get out of hand - minute changes are pored over with an almost religious devotion for indications of a greater propensity to pay claims. But generally the competition in wordings has been positive.

I am not a fan of the idea of standard policy wordings. This has been advanced as a potential solution to consumer confusion - but I think the loss of innovation would be greater.

Likewise competition in commission is suggested as an engine of consumer harm. One magazine recently suggested consumers should go direct.

But reviewing the premiums offered to consumers finds no correlation between lower prices and the absence of commission - but we knew that, every policy must be sold, the costs just emerge somewhere else if you do it a different way. So I am not keen on the idea of regulating commission either.

Even more disastrously, in some jurisdictions there are requirements that insurers accept some lives without underwriting. This is being tried with child health insurance in the USA right now.

It's a most unfortunate form of standardisation which has resulted in most insurers withdrawing from the child-only market.

These inputs: policy wording, underwriting, and commissions are rarely the proper targets of regulation or standardisation.

The consumer is nearly always the loser, as well as the insurer, and then the wider community which enjoys less protection. Where control mechanisms are identified as being required, a better approach would be to insist on clarity around payout ratios - managed over time, of course, to allow for fluctuations in experience.

That way consumers would get a good idea of what comes out of their insurance, which is, after all, the point. After that, they can make up their own minds.

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