In this general overview of insurance, we’ll be looking at:
- How insurance works
- How insurance providers calculate premiums
- If insurers make money from premiums
- If you need insurance
- Where to buy insurance
- How to find the right insurance policy
- Using online comparison sites
- How to reduce your premiums
- Giving information to your insurance provider
- After buying your insurance cover
- Making an insurance claim
- What to do if your insurance claim is rejected
UK insurance industry – An introductory guide
Although most people have some kind of insurance, how insurance companies work is a mystery to some people. In this general introduction we’ll be looking at the workings of insurance providers with information about how they calculate your premiums. There are also a number of misconceptions about how insurance works and how companies make their money – are they really rolling in money from all the premiums they collect from policy-holders?
The rest of this article looks at insurance from the policy-holders’ point of view with a step-by-step guide ranging in topics from whether you really need insurance to the factors to consider when choosing the right policy for you and how to reduce your premiums. Finally, there’s invaluable advice about how to make an insurance claim and what appeals procedure there is if your claim is rejected.
How insurance works
In very simple terms, you have a contract and agree to pay regular payments (or premiums) to your insurance provider, who will in return pay you for any loss covered in the policy. The money to pay your claim comes from the ‘pool’ of premiums paid by all policyholders.
How do insurance providers calculate the premiums?
Insurance providers use risk data to calculate the odds of an event (car accident, fire, theft, etc.) happening to you. The more likely this event is, the higher your premiums.
Actuaries are the people responsible for setting premiums; they evaluate, manage and advise on financial risk. They do this by using their knowledge of business and economics, their understanding of probability theory, statistics and investment theory to provide this financial advice.
There are two factors that insurance companies have to take into account when setting a premium for you: how likely in general this event will happen (i.e. how many burglaries are there in a year?) and equally importantly, how likely this specific event will happen to you (e.g. how many burglaries are there in a year in your neighbourhood?) The probability of how likely this will happen is why premiums can vary and why you must always notify your insurers of a change in your circumstances such as a change in address.
What insurers are really doing is managing risk; they’re taking on risk in return for your premiums and using this money to pay out claims.
What insurers are really doing is managing risk; they’re taking on risk in return for your premiums and using this pool of money to pay out claims. Underwriting (or evaluating the risk each client represents) is the key to a successful insurance company since they want to minimise the amount of money paid out in claims. They need to find a happy medium so the premiums are not too high nor too low. In this way, they have enough money to pay out claims but also have money left over to invest. However, they shouldn’t be so expensive that they’re losing potential clients.
Do insurers make all their money from premiums?
When you see how much money you pay for your premiums and calculate how many clients your insurance provider has, you’d be forgiven for thinking that all of their profits are generated by policyholders like you. However, this is far from the truth.
As a business, insurance companies receive their money in advance, before a service is provided, but their main problem is that they don’t know how many people will make a claim in one year and how much these claims will cost them. As a result, actuaries estimate the probable losses, add the estimated management and distribution costs and add a ‘margin’ of about 2%-5%. This money is set aside to cover potential pay-outs to policy-holders like you and the rest of the money is invested.
Most insurance companies would probably be happy to cover their losses from this pool of money since their major profits come from the returns on the investments they make and interest on the money they receive.
In your contract with your insurance provider, you agree to pay regular premiums in return for cover against a possible loss.
Your premiums are calculated so the higher the risk of an event happening, the higher your premiums.
Actuaries calculate how likely the event is in general and how likely it is to happen to you specifically to set your premiums.
Insurance pay out claims from a pool of money from all policy-holders but their main profits come from investments and interest on the money they’ve collected.
Do you need insurance?
Before you take out cover, you should consider carefully whether it is needed. Some policies are to prevent loss while others are compulsory. For example, motor insurance is required by law whilst you might need insurance as a condition for a loan agreement such as a mortgage. Other insurance policies are completely up to you but you might want cover for your own peace of mind.
The other common mistake that people make is to double up on insurance policies, which means you’re paying twice for the same thing. For example, your home policy often covers you for possessions taken out of the home so you don’t need a separate policy while your breakdown policy might cover you when you go on holiday too.
Another reason why you might not need insurance is if it’s offered as part of your employer’s benefit packages. Before paying extra with another company, see what cover there is and if necessary, ask if it can be extended for a nominal extra fee.
Once you’ve decided that you really need to take out an insurance policy, you should think about what to include, for how long/much you need it and whether you want it only for yourself or whether you wish to include others such as your partner or children.
Where to buy insurance
Depending on the insurance cover you require, there are a number of places to find the policy you require. Many banks, building societies, supermarkets and department stores offer insurance policies. There are also many comparison sites and online insurers.
Alternatively, you could seek professional advice through different professional bodies of the UK insurance industry. The BIBA (British Insurance Brokers’ Association) helps 250,000 people a year through their ‘Find a Broker’ Service. The ABI (Association of British Insurers) represents the UK’s insurance and long-term savings industry. Although it doesn’t sell insurance directly to the public, it has a directory of its 250 members in alphabetical order which can be consulted. You could also speak to an independent financial adviser through the Association of Professional Financial Advisers.
For your own protection, you should make sure that the company, broker or financial adviser is a member of a professional body. Finally, you should never purchase insurance through social media sites, from motor repair shops or in pubs and newsagents.
How big is the insurance market in the UK?
According to the ABI, the insurance market in the UK is the largest in Europe and the 3rd largest in the world.
How many people are employed in insurance in the UK?
The ABI says that the insurance sector employs over 300,000 people: 114,300 directly and another 219,700 in auxiliary services such as broking.
How much do insurance companies contribute to investments in the UK?
Insurance providers were responsible for investments of £1.8 trillion in 2013, which was 25% of the UK’s total net worth. (Statistics from ABI).
How big is the ABI?
The 250 members of ABI make up 90% of the UK insurance market and in 2013 its members paid £12 billion to the British government in taxes.
What personal factors do insurance companies take into account when calculating my premiums?
Depending on the type of policy you wish to purchase, insurance providers would look at your personal circumstances such as your age, where you live, what you plan to do and how many times you have made a claim in the past.
How to find the right insurance policy
Like many other consumer products, the key to finding the right insurance policy for you is to look around, compare prices and cover and always get a number of quotes before deciding.
Shop around even for something which is offered alongside the purchase of something else. For example, when buying a holiday you might be able to find travel insurance much cheaper than from your travel company, even if you require travel insurance for over 60s.
Using online comparison sites
In these days of easy internet access, many consumers use comparison sites to find an insurance policy. It’s a good idea as you have all the information at your fingertips but there are a number of things to be wary of when using such sites.
First of all, it’s impossible for one site to have every single insurance provider in the UK so it’s advisable to use more than comparison site to have an idea of what’s available on the market.
The second thing to bear in mind is that comparison sites are quite generic so if your circumstances or requirements are non-standard because of, for example, a long-standing medical condition or your driving record, then you might need specialised advice from an insurance broker. They are paid a commission fee by insurance providers so don’t worry that shopping around will cost you extra money.
When using these sites, don’t choose a policy on the basis of the one with the lowest premiums. You should also consider different charges, the types and level of the cover provided and how much your excess is. Your excess is the amount you pay towards your claim. Some insurance providers deliberately set the voluntary excess as very high or they factor in more exclusions which aren’t immediately apparent so they come out the cheapest on comparison sites.
Before taking out an insurance policy, decide if it’s absolutely necessary – some insurance is required by law whilst other policies are for your peace of mind.
Insurance can be purchased from many different providers including banks, building societies, supermarkets, department stores and through the professional bodies of the insurance industry.
In order to find the right policy, you should shop around and get quotes.
Online comparison sites are useful but there are a number of things to be careful about – use more than one site and don’t choose a policy on price alone.
Reducing your premiums
There’s little you can do about risk factors such as your place of residence but there are ways to reduce your premiums. You should be very careful when you fill in pre-filled answers since the way you answer can have an effect on the amount you pay. For example, housewives are considered to be safer drivers than unemployed people so if you’re both unemployed and a housewife, choosing the answer box ‘housewife’ means your premiums will be lower. Of course, you should never lie to your insurance company since deliberate deceit means that your policy can be declared invalid but there are different ways of presenting the same information.
Another way to decrease the amount you pay for your insurance premiums is to buy all your different policies from the same company since you might be entitled to a discount. Your payment method has an effect on how much the policy costs in total as well. If you can, pay your insurance in a lump sum since interest is added to monthly premium instalments.
You might balance up the risk factors and decide to voluntarily pay a higher excess and/or add more exclusions to your policy in order to have lower premiums.
Finally, if after shopping around, you decide to switch insurance providers, you should let your previous insurance company know since they might be prepared to offer a discount on your premiums as a way to keep your custom.
In the long-term, the best way to save money on your insurance premiums is to build up your no-claims bonus. This could mean that you pay for the theft of a small item out of your own pocket instead of making a claim, losing your no-claims bonus and having higher monthly instalments. You have to balance the long-term financial cost.
Giving information to insurance providers
In order to calculate your premiums, your insurance provider must ask you personal questions about your circumstances and past history. You should answer all questions honestly especially about such things as medical conditions and your driving history. Although they can’t refuse a claim if you unknowingly give inaccurate or incomplete information, they can reject a claim or cancel a policy if you deliberately give dishonest answers. Information about any previous claims you’ve made against other insurance companies can be found on the Claims & Underwriting Exchange Database.
The Consumer Insurance (Disclosure & Representations) Act of 2012 explains exactly what information you have to give to take out, change or renew a policy although the insurance provider is responsible for asking all the questions. If you apply for a policy face-to-face, you’ll fill in a proposal form but if you apply by phone or through the internet, then this is called a ‘statement of facts’.
Your insurance provider may try to persuade you to include add-ons. Think twice before adding anything to your policy.
When taking your personal details, your insurance provider might try to persuade you to have extra add-ons. Think twice before adding anything to your policy about whether it’s actually necessary – anything added to the basic cover leads to a corresponding increase in the size of your premiums.
There are a number of ways to reduce your premiums such as being careful how you choose pre-filled answers, buying all your policies from the same company or paying annually instead of monthly.
Asking your existing insurance provider to match the lower quote of another company and voluntarily paying higher excess or adding more exclusions can decrease the amount you pay for insurance cover.
To keep your no-claims bonus, it might be better to pay for small claims yourself.
It’s important to give full and honest answers to your insurance company as trying to deceive them could lead to claims being rejected and your policy being cancelled.
What does reinsurance mean?
Regulators of insurance companies usually insist on reinsurance. This means insurance providers reduce their exposure to risk by passing on the risk to one or more re-insurers. As a result, they’re still able to meet policy-holders’ claims even if they get an abnormally high number of claims in one particular year.
Who regulates the insurance sector in the UK?
There are now two regulators of the insurance sector in the UK: the FCA (Financial Conduct Authority) and the PCA (Prudential Conduct Authority). The FCA protects consumers and financial markets as well as promoting competition. It monitors the conduct of 56,000 financial services firms and financial markets and is the prudential regulator for 24,000 of them. The PCA regulates how they carry out their prudential obligations.
There are now two regulators of the insurance sector in the UK: the Financial Conduct Authority and the Prudential Conduct Authority.
How many insurance brokers are there in the UK and how much do they contribute to the UK’s GDP?
BIBA has 2,000 regulated firms employing staff of more than 100,000 people. According to BIBA, general insurance brokers contribute 1% to the GDP of the UK.
What are ‘ghost brokers’?
‘Ghost brokers’ sell fraudulent policies usually for motor insurance. They either use genuine documents which have been doctored with the purchaser’s details or they fake policy documents using the logo of legitimate companies.
How can I avoid becoming a victim of fraudulent policies?
You should check your insurance adviser on the Financial Services Register (which can be found on the website of the FCA). If you have suspicions about your policy, contact the company directly and make sure the details on the policy match your own. Complaints about insurance fraud can be reported to the IFB (Insurance Fraud Bureau) by calling 0800 422 0421 or filling a form on their website.
After buying an insurance policy
Once you’ve bought a policy, you’ll be given a summary document with the key facts of the policy:
- The details of the insurer
- The main features and benefits of the insurance
- Significant or unusual exclusions to the policy
- How long the cover lasts for
- Your cancellation rights
Your insurance policy contains the terms of your agreement with your insurer and should include a schedule with your personal details, the details of your specific policy including exclusions, excesses and any additional risks for which you’re covered.
All documents and their terms and conditions must be written in a clear and straightforward manner. Principle 7 of the FCA Handbook states, “A firm must pay due regard to the information needs of its clients and communicate information to them which is clear, fair and not misleading.” If something isn’t clear and you have any queries, then you should contact your insurer.
There should also be a ‘Your right to change your mind’ document, which gives you details of the cooling-off period and how much time you have to change your mind. This is compulsory and could be any time between 14 and 45 days.
It’s your responsibility to make sure that your premiums are kept up to date and you can lose your cover even if you weren’t reminded by your insurance provider. Knowing when your policy lapses is especially vital for motor insurance, which is a legal requirement for driving on the roads. You could face a fine of up to £300 and 6 penalty points on your licence if you are stopped by the police and don’t have insurance cover.
Making an insurance claim
Before making a claim, you should check your policy to make sure you’re covered by whatever has happened to you. In order to make an insurance claim for a burglary or robbery, you need to report the crime to the police first and receive a crime reference number. If you used a broker to purchase insurance, then they might be able to go through the claim procedure on your behalf.
You should make your claim to your insurance provider as soon as possible since many have a time limit when claims should be made. Your policy should give you details about how they can be contacted or you can find the number of their helpline on their website.
You should make a note of what you would like to say to them so that you can give a clear and factual report without any exaggeration. You should be prepared to give the date/times of the incident and what happened, what you’re claiming for and how much you expect to get and if necessary, the details of anyone else who was involved. Depending on your claim, it might be a good idea to provide evidence of damage such as photos and videos.
Every time you speak to your insurance provider about your claim, you should note the time/date you spoke, who you spoke to and what was said. You should keep all copies of your letters to the company and all their letters to you.
The documentation from your insurance provider should give details of the main points of your policy and should be written in clear language.
You have a cooling-off period during which you can cancel your policy.
It’s your responsibility to make sure premiums are kept up-to-date and that you renew your policy when it lapses.
You should make an insurance claim as soon as possible and if necessary, file a police report first.
When making a claim, you should give a factual report explaining what happened and keep a record of any contact with your insurance provider, whether this is by phone or letter.
What to do if your claim is rejected
If you feel that your claim was unjustly rejected, you should contact your insurer and explain why you consider that their decision was incorrect quoting from your policy if necessary and reiterating the reasons for your claim and the incident you were involved in. This complaint can be done by phone to a complaint handler or by writing a letter. The Money Advice Service has a template on their website about what information you should include in your letter of complaint.
They are obliged by the FCA to respond within 8 weeks. If they don’t or their answer is still to reject your claim, you can refer the matter to the FOS (Financial Ombudsman Service). The FOS is an independent body who are responsible for settling insurance disputes by considering both sides looking at the documentation and reaching a fair decision by using common sense. They only represent individuals and not companies and their service is completely free of charge.
The FOS can ask an insurance provider to explain their actions, apologise and pay compensation or change their decision and can award a maximum of £150,000. The complaint is first looked at by an adjudicator but if the insurance provider is dissatisfied, it can go to an ombudsman, whose decision is final and binding.
If you’re unhappy with the decision of the FOS or your claim is worth over £150,000, then you can seek legal advice and pursue the matter further by suing in court.
How much money does the insurance sector add to the GDP of the UK?
According to the ABI, the insurance sector contributed £29 billion to the GDP of the UK in 2012, which was more than 1/5th of the total value added for the financial services industry.
Why are claims rejected by insurance companies?
The most common reasons why claims are rejected by insurance companies are because the policy-holder gave incorrect information about the incident for which they’re claiming or because they didn’t answer the questions on their application for insurance cover accurately and truthfully. Also, some claims are rejected because the company feels that the policy-holder didn’t take the necessary care and were negligent. For example, they were robbed because they left valuables in their car in full view of passers-by.
Apart from photos and videos, what other evidence can I provide to support my dispute with my insurance provider?
You could support your claim with the evidence of a loss assessor, who will look at the damage and write a report for your insurance company as evidence. The services of a loss assessor are not free and they can be found on the website of their official body, the Institute of Public Loss Assessors.
Can I make a complaint to the FOS if my premiums are too high?
No. You can only refer your grievance to the FOS if you have made a formal complaint about an insurance claim to your provider and it hasn’t been answered within 8 weeks or your insurer has continued in their refusal to pay out your claim.