New insurance rules will see premiums rise

15 December 2009

Insurers will have to pay out millions more in claims under proposed legal changes – but consumers have been warned that premiums will rise as a result.

A review of insurance contact law, carried out by the Law Commission and its Scottish equivalent, wants to simplify the law around the information consumers should tell insurers when taking out a policy.

Currently, it is up to consumers to disclose all the relevant information to insurers – however, under the proposed changes, insurers would be obliged to collect all the information they need in advance.

Failing to mention information on application forms - known as non-disclosure of information - has long been a big issue for consumers, as it can result in claims being rejected.

Consumer groups such as Which? have previously attacked insurers, claiming they were using non-disclosure rules to wriggle out of paying valid claims. In some cases, lengthy application forms required prospective policyholders to remember and accurately record every minor ailment and visit to the doctor over the previous five years.

Last year, however, the Association of British Insurers introduced new guidelines that aimed to protect policyholders who innocently withheld information. Since then, the number of critical illness claims turned down for non-disclosure has halved.

But the Law Commission says the current law - which is more than 100 years old - is still too confusing. “Insurers can refuse to pay out if a policyholder failed to disclose any relevant information, even if the consumer answered all questions that were asked honestly and reasonably,” it says in a statement.

However, the cost of updating the law remains to be seen. The reforms are expected to see additional claims payments of £4.4 million in the life and protection market, and between £5 million and £20 million in the general insurance market.

While this is good news for consumers making claims, who might previously have been rejected, insurers are likely to offset the cost by raising premiums across the board.

“We anticipate that the cost of additional claims would be passed on to consumers,” the Law Commission adds. “This would add around 0.08% to the cost of life and critical illness insurance and 0.025% to 0.1% to general insurance.” 

This is equal to 2.5p and 10p extra for every £100 of premium currently paid.

However, David Hertzell, the Law Commissioner who is leading the project, says insurers and consumer groups alike back the proposals: "Our reforms would improve consumer protection, increase consumer confidence and enhance the reputation of the insurance industry.”

The Law Commission also points out that the reforms wouldn’t make it easier for consumers to get away with lying to insurers. Policyholders would still have a responsibility to answer questions “fully and accurately”.

“It is only if they answer questions dishonestly or recklessly that insurers are permitted to refuse all claims and retain any premium,” it adds. 

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