Introduction – The history of insurance in the UK
You could argue that insurance dates back to earliest times although it wasn’t in a form that we’d recognise today. Many ancient civilisations used to make use of granaries to store food like cereals and rice; this can be seen as an indemnity against famine. The rulers didn’t have a humanitarian purpose but were more concerned with keeping public order; hungry citizens are much more likely to riot.
Throughout the Middle Ages in the UK, the establishment of Guilds served a purpose which is reminiscent of present-day insurance companies. They would pay for the funeral expenses of their members and also care for the families of deceased members too. In the 17th century, the ‘Friendly Societies’ used to do similar work; the donated sums of money (which could be viewed as the equivalent of premiums) would be used by members when they had an emergency and needed financial assistance.
The emergence of contemporary insurance
Modern insurance, in the form of protection for property, really started in the aftermath of the Great Fire of London (1666) when over 13,000 houses were destroyed. In 1681 Nicholas Barbon and 11 associates established the ‘Insurance Office for Houses’, which originally insured 5,000 houses. In the light of their success, other companies were formed and each would have their own fire-fighting brigade. Houses would be given a ‘Fire insurance mark’ – usually installed over the main door of the property – so individual brigades would know which buildings were under their protection if a fire broke out. This was only in London in its early stages and didn’t become available in other parts of the UK until 1710.
In the same period London was becoming increasingly important as a centre for trade and the possible losses of both exports and imports made insurance imperative to protect shipping. In the 1680s Edward Lloyd set up the marine insurance company which still bears his name today.
The origins of life insurance in the 18th century
Although the first life insurance policies were set up in the early 18th century, it wasn’t until the 1750s that there were mathematical and statistical tools to calculate what the premiums and payouts should be. You should read Chapter 1 about how insurance companies work out premiums to see that despite the more sophisticated methods and technology in use today, the way insurance companies work hasn’t really changed in its basics over the past three centuries. In 1762, mutual insurance (life policies) were based on mortality rates.
Accident insurance was started in reaction to the number of fatalities on the early railways and the first company to offer cover was the Universal Casualty Compensation Company in 1848.
The end of the 19th century also saw the beginning of insurance against burglary (Lloyds in 1887) and motor insurance in 1896. However, it wasn’t until 1911 and the National Insurance Act created by the Liberal government that there was a contributory system against illness and unemployment. The publication of the Beveridge Report in 1943 and its implementation in the aftermath of the Second World War saw the beginning of the welfare state in a form which we would recognise today. At the time, people thought that care from the state with its comprehensive benefits would mean the demise of insurance companies. But as you know, people in the UK continue to take out private insurance policies despite the NHS, sick pay, disability allowances and pensions. Chapter 2 answers the question: why do some people choose to take out insurance policies instead of expecting the state to take care of them?
Is insurance really necessary?
Apart from Chapter 1, each chapter of this guide to insurance answers the question of whether the insurance under discussion is necessary. You’ll see that you’re legally obliged to take out some types of insurance such as car or motorbike insurance or some business-related insurance. For other types of insurance, whether to take out an insurance policy is at your discretion although it might be highly recommended. For example, home contents insurance.
Why should you take out insurance? The main reason why people choose to take out insurance cover is that they wish to protect themselves, their loved ones and their property from harm. The insurance policy can be seen as a safety net that protects them from financial loss as the result of unforeseen circumstances beyond their control whether that is a fire or a redundancy. Without a crystal ball to tell us what is going to happen in the future, insurance is our best safeguard, a protection against that just-in-case scenario. Before reaching a decision about purchasing a policy, ask yourself how you’d be able to cope if the worst happened. Being robbed or being involved in an accident is a frightening and stressful time but how much worse if it’s accompanied by financial worries as well.
Looking for an insurance provider
The best way to find an insurance provider is to check with the ABI (Association of British Insurers). Alternatively, you should check that your insurance provider is on the register of the FCA (Financial Conduct Authority). In this way, you know that your money is protected, that the company is legitimate and follows a code of practice and that there’s a grievance procedure in place if you ever feel that you’ve been misled or mistreated by your insurer. If you need a broker, the BIBA (British Insurance Brokers’ Association) has a ‘Find a broker’ service, which offers the same guarantees as the ABI.
Why do insurance companies reject claims?
One of the most common reasons people give for not taking out an insurance policy is that it’s a waste of money. Not because they believe that the event they’re insuring against will never happen to them but because of the reputation insurers have for rejecting claims on the flimsiest of pretexts. Let’s look at this misconception in more detail – do insurers really use any excuse to avoid paying out?
In an effort to dispel this idea, the ABI did a 2-year study of the claims made against their member companies for 3 of the most common insurance policies; car, home and travel. The results, published in 2016, might surprise you.
Of the 4.3 million claims for car insurance, 99% were paid out at an average cost of £2,160. 43,000 claims were rejected because the policyholder didn’t lock their car, they were driving under the influence of alcohol or they’d lent their vehicle to someone else.
79% of claims for buildings/home contents insurance were paid out at an average of £2,520 per claim. Of the 378,000 policyholders who received a negative answer from their insurers, this was because the damage was due to general wear and tear or lack of maintenance, the damage was below the level of their excess or they claimed for accident cover even though it wasn’t included in their policy.
87% of policyholders received a payout when they claimed on their travel insurance with the average claim being £884. Reasons given for turning down their claim were that their trips were cancelled too late, people couldn’t prove that something had been lost/stolen, their claim was under their excess level or they hadn’t informed their insurers of a pre-existing medical condition.
Lessons to be learnt from claim rejections
There are a number of conclusions to draw from this report which can help you with your own dealings with your insurer so that any claim you might make is less likely to be rejected.
The first is that you should know and understand the terms and conditions of your policy before signing. As we’ve seen above, the policyholders shouldn’t have had their claim for home insurance turned down because they would have known whether they were entitled to accident cover or not. Similarly, an understanding of what excess is and how it works would have meant the claimants wouldn’t have expected payment for sums less than their excess level.
Another way you can ensure that your insurance claim is approved is to make full disclosure of all facts when taking out a policy. For example, you must inform insurers of pre-existing medical conditions, points on your driving licence and claims you’ve made in the past. Often such matters only come to light when you’re making a claim from the company and need their financial assistance.
Remember that it’s your responsibility to prove the validity of your claim to your insurance providers. In cases of theft, the matter must be reported to the police so you have a crime reference number whilst in cases of water damage caused by burst pipes or flooding, the loss assessor must see the ruined furniture. Of course your first reaction is to make some efforts to clear up the mess but your insurance provider needs to see proof.
Other circumstances to be careful of are making a claim for something which happened when you’d been drinking alcohol. Not only the obvious case of when you’ve been driving but for the theft or loss of personal possessions. Even your claim for theft while on holiday can be rejected for this reason (see Chapter 8 about travel insurance). This is part of insurers’ expecting you to take due care and not be negligent; do you think you should receive a payout for leaving your car unlocked or a mobile phone left unattended on a restaurant table?
How long do you wait for insurance payouts?
It’s perfectly understandable that when you make a claim, you want – and very possibly need – the money as soon as possible. However, the claims procedure is often not as straightforward as we’d like it to be. To ensure that your claim is processed as quickly as possible, you should make sure you contact your insurers as soon as you can and that you have all the proof and facts to hand.
Personal injuries can often be settled out of court within a week but with fires, it might take months to evaluate the damage and settle the claim. For car accidents, the investigation needs to establish who was responsible and the extent of injuries and quite often there are 2 different insurance providers. It’s very difficult to get a definite answer about how long it takes for an insurance claim to be settled and paid.
Are insurance settlements taxable?
Any insurance payments to a policyholder who is sick, disabled or unemployed to meet their financial commitments (including income protection or critical illness cover) are completely tax-free. The same is true of any compensation or damages for personal injuries whether received in a lump sum or over a period of time and whether awarded by a court or won in an out of court settlement.
The only time that tax might have to be paid is for a life insurance policy when the beneficiaries receive money due to the death of the original policyholder. Life insurance inheritance tax is calculated at 40% for estates worth over £325,000 but can be avoided if a trust fund is set up with the help of a financial adviser.
Using this guide to insurance
Theoretically (meaning if you can find someone to underwrite the policy), it is quite possible to insure anything. Hence, all those stories we occasionally read in the tabloids about celebrities insuring their legs or voices for ridiculous amounts of money. Think about it – have you ever heard of anyone actually making a claim for those outrageous sums or wondered how the premiums were calculated? It makes you wonder if they’re nothing more than publicity stunts.
You’ll be relieved to hear that in this guide to insurance, we’ve tried to include the most common insurance policies that you’re most likely to need in the course of your life – to protect yourselves, your loved ones and your property.
Chapter 1 begins with an overview of the insurance industry, how it works and how insurance providers make their profits. The second part of the chapter is written from the policyholder’s point of view including information and advice about how to find an insurance company, what pitfalls to look for when comparing policies and how to examine the terms and conditions of the policy critically. There are also general guidelines about how to ensure your cover isn’t cancelled, how to make a claim and what to do if you feel your claim was unfairly rejected.
Chapter 2 looks at National Insurance in the UK with information about your National Insurance number, how often it’s paid and so on. In part, NI contributions are used to fund state benefits. That being the case, why do some people feel the need to take out private insurance such as Income Protection insurance or life insurance?
Chapter 3 is all about protecting your home: both the building (in the case of homeowners) and its contents. As well as looking at insuring the home itself, we’ve also included guidelines on the possible ways of insuring your mobile phone and whether it’s worth taking out an extended warranty for electrical appliances.
With 36.7 million vehicles on the road in the UK and with motor insurance being mandatory, both car and motorcycle insurance are of interest to the majority of the population and we’ve explained the topic in some depth in Chapters 4 and 5.
In the next chapter we consider whether it’s worth taking out private health or dental insurance seeing as we have the NHS in the UK. We also look at healthcare cash plans and capitation plans and weigh up the pros and cons of both as an alternative to private health insurance.
According to official figures of the government, there are 4.3 million small or medium-sized businesses in the UK employing an estimated 12 million people.
Because of their importance, Chapter 7 is all about business-related insurance with guidelines for self-employed home-based workers and tradesmen as well as for shop-owners. We consider the main types of insurance: public liability, professional indemnity, employers’ liability, commercial property and business interruption insurance. We answer the questions about who needs it, whether it’s compulsory and what it covers you for.
In research by ABI in 2016, it was found that 1 in 4 travellers don’t bother taking out travel insurance. Chapter 8 clears up some misconceptions about help when you run into trouble abroad and what factors to consider before taking out a policy for your holidays.
To complete our guide to insurance, Chapter 9 (pet insurance) and 10 (wedding insurance) are about two types of insurance which used to be a highly-specialised market but which are becoming increasingly popular. We look at what cover you can expect and whether they’re worth purchasing.
In each chapter 2-10 devoted to different types of insurance cover, we’ve analysed what a good policy should include, the typical exclusions or add-ons, how to reduce your premiums and also considered whether there are alternatives to this insurance cover.
Table of Contents:
Chapter 4: Saving money on car insurance
Chapter 5: The importance of motorcycle insurance
Chapter 8: Don’t leave home without travel insurance
Chapter 9: Is pet insurance absolutely necessary?