Two simple rules for cheaper insurance

These two new laws would make quotations and renewals a whole lot cheaper...

In May of this year, my wife received a renewal notice for her car insurance.

Existing customers are sitting ducks

My wife’s insurer wanted to charge her £268 for her 2010/11 policy. We then checked to see how much she paid in 2009/10. It turned out to be £225, so her insurer wanted an extra £43 for renewing her policy. That’s a hefty increase of almost a fifth (19%) in just 12 months.

On checking the AA’s British Insurance Premium Index, I discovered that, on average, the cost of fully comprehensive car insurance increased by just over 13% in the year to April 2010. Hence, my wife’s premium increase was quite a bit ahead of the average.

Of course, my better half didn’t pay £268 for her latest policy. Instead, she shopped around for a better quote. The lowest premium Mrs D’Arcy could find was £234, which she asked her insurer to match. It duly did so, so her premium rose by just £9 instead of the proposed increase of £43.

Therefore, by shopping around for, say, 30 minutes, my wife saved £34 this year. This works out at more than a pound a minute, which is a great return on her time.

Taken for a ride at renewal

What annoys me about insurance renewals is that insurers never, ever put your previous premium on their quotes. In their view, this would draw unwelcome attention, making you immediately aware of this year's premium increase.

Thus, insurance companies and brokers will quote your new premium, but never your existing premium. This enables them to treat existing customers like sheep, hiking premiums year after year with few complaints!

Let’s change the rules

I think it’s high time that this exploitation of existing policyholders (to the benefit of new customers) should end. Therefore, I propose the introduction of a very simple regulation which would force all renewal notices to contain the following basic information (based on my wife’s premiums):

At a glance, you can see exactly how much you’re paying and how much extra it will cost you to renew. In many ways, this is similar to the ‘Summary Box’ which credit-card issuers are forced to provide to cardholders.

As a former financial-marketing manager, I believe that this simple change would, at a stroke, encourage millions more policyholders to shop around for better deals, thus making car insurance more competitive for us all.

Cleaning up commissions

While we’re at it, let’s introduce a second law to clean up tens of millions more insurance policies.

When you buy an investment or life insurance, the provider and adviser must give you very precise information on the plan’s charges, commissions paid to your adviser, etc. This disclosure enables you to see how much of your precious capital will be eaten up by charges, fees, sales commission, and so on.

Alas, the same rules don’t apply to general insurance policies, such as car insurance, home insurance, travel insurance and the dreaded payment protection insurance. Therefore, the absence of commission disclosure allows for ridiculously generous commissions for some insurance policies.

For example, the worst kinds of payment protection insurance (PPI) are so profitable that they allow providers to pay total commissions (upfront and via profit-sharing) of up to four-fifths (80%) of the total premium. In other words, these policies are often five times as expensive as they need to be.

In my view, introducing full commission disclosure would clean up rip-off commissions at a stroke. Imagine the following insurance quote or policy renewal (a theoretical quote for a PPI policy):

Who in their right mind would buy such a policy, knowing that £4 out of every £5 is shared out in commission? Frankly, I doubt that anyone would buy this rubbish, which would lower premiums to the benefit of all policyholders.

Lastly, if you think such disclosure wouldn’t work, then think again. In America, the Insurance Commissioner of each state enforces strict curbs on how profitable policies can be. Likewise, in Australia, a commission cap restricts total commissions to a maximum of a fifth (20%).

These foreign rules promote healthy competition in insurance markets in the US and Oz, helping to drive down premiums and reduce profiteering by insurers and their partners. So, let’s do something similar over here.

Which consumer-protection laws would you like to see introduced? Please tell us in the Comments box below!

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