A "market for lemons" - the Insurance Act 2015
It is of course very early days in the history of the Insurance Act. Day 61 since implementation and a long way to go before it approaches the nearly 40,000 day life span of its predecessor. It will be some time, perhaps years, before we will have a body of law on which to make an assessment of its legal quality and this will itself turn on the happenstance or peculiar facts testing terms, no doubt under the strain of a large loss. Yet are there any lessons to be learnt at this early stage?
A good starting point is to remember the description of the insurance market by the then Insurance Bill’s sponsoring Government Department. HM Treasury spoke, in the Impact Assessment when the Insurance Bill was presented to Parliament, of the risk of the sale of lemons:
“In other words, insurance buyers find it difficult to assess the quality of insurance when entering the contract. They cannot tell whether the claim will be paid without difficulty, or whether the insurer will exploit loopholes in the law to delay payment and reduce the size of settlements. The effect may be a “market for lemons”, where poor quality products drive out the good ones. Buyers may be forced to buy poor quality insurance for low prices, when they would prefer to buy good quality products for higher prices.”
The irony should not be lost of a contract of utmost good faith (though modified by law and regulator in respect of consumers and to a lesser extent for businesses), which is not often trusted by its purchaser. The challenge for the insurer is that all too often the product’s customers assume that they will rely on “small print”, that claims will be paid slowly.
Thus it has been fascinating to observe, respond to, comment upon and advise on the first changes in 100 years to the core product of commercial insurance and whilst certainly premature, through research and interviews for the Post Magazine Claims Summit, I am able to offer a few tentative observations below.
There has been quite a considerable conversation about the Act. It might have been a little “lumpy” with a good deal of activity on enactment in February 2015 and again as we approached commencement in August 2016. Wordings have been revised and a lot of work undertaken by many organisations as well as insurers. Alternative products have been offered with “additional premium” being amongst the most noteworthy but other responses have been considered, offered and rejected.
There has been a good deal of dialogue with those willing to be engaged and a plethora of guides and training (and blogs!). The new legislation does bring a focus on the process of placing a risk where the test lies in the future. Whether the training and implementation has been successfully cascaded down within organisations and out of organisations to brokers and policyholders is again an area where it is too early to say.
The challenge of explaining all of the above does rest with the broker and one must have sympathy with that challenge given the issues outlined by the Treasury. Additionally the fact is that the commencement date interrupts the natural evolutionary process of change and product development in the market and creates a catalyst that must appear to be an overwhelming tsunami (which happily only happens once a century!).
So whilst it is certainly too soon to reach any judgment on the Act we can perhaps reflect, as things start to bed down, that it is good to have had a conversation concentrating on the product and not just the price. There has, consequently, been an opportunity to consider the value of an insurance policy and not just its cost and in so doing perhaps we can take a few more steps along the journey that ensures that UK Plc gets good reliable policies with the right terms accurately priced, not the poor quality products mentioned by the Treasury as the “market for lemons”.
I was pleased to first publish this blog on the BLM webpages on 12/10/2016.