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ombudsman news

issue 144

April 2018

insurance pricing

Over the last year or so we’ve continued to hear from people who are unhappy with the price they’re paying to protect their homes, cars and other things that are most important to them.

The rising popularity of price comparison websites has meant customers have access to a greater choice of insurers than ever before. But not everyone chooses, or is able, to shop around. And a large number of people still rely on their existing insurer, who they’ve bought cover with for a number of years, to provide the cover at what they assume to be the most competitive price.

Recent media coverage has raised many concerns about what information insurers use to calculate prices and whether the prices on offer are truly reflective of the risks a customer presents. Both the Financial Conduct Authority (FCA) and the Competition and Markets Authority have introduced new rules and guidelines to help insurers and intermediaries give clearer information to customers about the products they offer and the prices they charge.

We asked one of our senior ombudsmen, Sean Hamilton, to tell us about some of the insurance complaints we see about pricing and explain our approach to dealing with these issues fairly.

Do you see a lot of complaints about the cost of insurance?

We receive around 200 complaints a month from people unhappy with the price of their insurance. Many of these involve one-off increases, where insurance premiums have risen because of a claim or the insurer’s view of risk has changed. But some people have complained about increases in their premiums over a longer period.

We’ve done a lot of work with insurers to understand how premiums are calculated – and in turn help us to determine whether customers have been treated fairly. We’d generally expect an insurer to be able to show us what’s given rise to an increase in the price. And that the same criteria would have been applied consistently to all their customers.

In most cases, we find that customers have been treated fairly. But in some, we do find evidence of mistakes being made by insurers or brokers, customers being misled about the price of their policy or inconsistent criteria being applied that’s adversely affected some people. Where we think someone’s been treated unfairly, we’ll look to put that right.

    Mr K was planning to take a luxury cruise with his wife and wanted to take out travel insurance for the trip. Mr K called the insurer and underwent a full medical screening for him and his wife. After the screening, the sales adviser gave him a quote of £380 for comprehensive insurance for the holiday. This was guaranteed for 30 days. Mr K told the insurer he wanted to secure his booking before paying for the policy.

    When Mr K called the insurer back to accept the quote within the 30 day period, he was told it couldn’t be honoured as the price he’d been given was a mistake. The insurer said that there had been a problem with its IT systems during the medical screening. This meant the pre-existing medical conditions Mr K had disclosed hadn’t been included in his original quote.

    The insurer told Mr K he could still take out the policy. But the correct premium would be over £1,000 more for the reduced basic cover, or£2,000 for the comprehensive cover he’d originally wanted and had been quoted for.

    Mr K and his wife had already spent a lot of money on the cruise tickets and simply couldn’t afford that additional cost. So they now faced a choice between travelling without insurance or having to cancel the trip.

    The insurer offered Mr K a 20% discount on the premium. But this still meant he’d be paying over a £1,000 for cover, which he couldn’t afford. So, Mr K didn’t want to travel without cover and cancelled the trip, losing his £650 deposit.

    Mr K was very unhappy with how he’d been treated and asked us to look into his complaint.

    how we helped

    We spoke to the insurer about Mr K’s situation. We were told that the IT problem had been an isolated incident and no other customers had been affected. But Mr K had relied on that information being accurate to book the holiday.

    As the insurer had made a confirmed offer of cover, and Mr K had called to accept the quote in time, we felt it was unfair for it not to have honoured the original price, particularly as he’d accepted the price within the 30 day guaranteed period. It had put Mr K in a position where he felt the need to cancel his cruise. So we told the insurer it should reimburse Mr K’s deposit for the cancelled holiday.

    We also thought Mr K had been put in a very difficult position. And it would have been very upsetting for him and his wife to plan for a holiday, only to have their plans ruined because of the insurer’s IT problems. So, we also told the insurer to pay Mr and Mrs K £200, in recognition of the inconvenience and upset they’d gone through.
    Miss R contacted us after her insurer increased her renewal premium for her car by 60%. Miss R’s policy had been set for automatic renewal and she didn’t notice the increase in her premium until a few months after the renewal.

    When Miss R asked her insurer why the price had gone up, she was told it was because of an incident she’d reported the previous year. Miss R questioned this, as she didn’t make a claim for the incident, because the damage to her car was minimal.

    The insurer explained that while the incident would have been a factor in the increase, there were many different reasons why a premium could change. So it would be very difficult to break down the increase, as a lot of the pricing information is commercially sensitive.

    Miss R was unhappy the insurer wouldn’t give her a clear explanation for the increase in her premium and asked for our help.

    how we helped

    We asked the insurer for a breakdown of the calculations for Miss R’s premiums, from before and after the reported incident. We compared the calculations for both years and identified the areas, including the incident, which affected the price Miss R had paid.

    While the incident was a significant reason for the increase in price, it wasn’t the only contributing factor. The removal of introductory discounts – which only applied to the first year – also affected the renewal price, along with a general increase in the insurer’s base premium for all of its policies.

    We explained to Miss R that it was reasonable for an insurer to look at a reported incident as something that could affect their view of risk for a policy. Most insurers take differing views of risk. And this can lead to significantly different prices for covering the same thing.

    In general, we don’t tell insurers what factors to take into account when considering risk or what price they need to charge to cover those risks. That will be affected by many things, including an insurer’s wider business economics.

    We checked and it was clear the insurer had calculated Miss R’s premium in the same way it would have for any other customer in similar circumstances. So we didn’t think it had treated Miss R unfairly when increasing her price.

What about policies which roll-over automatically – are vulnerable customers likely to be caught out by price increases?

We regularly receive complaints about policies that automatically renew, with the premium increasing each year. In many of the cases we see, relatives of elderly customers bring these complaints to us after they’ve searched the market and discovered a similar policy — often from the same insurer — at a much lower price.

It’s often the most vulnerable customers who are likely to be susceptible to detriment in these situations. But we’ve seen complaints about long-term price increases from people with a range of backgrounds – including those who you might not think of as vulnerable.

There may be some customers who place a great deal of trust in their insurer or broker over many years of loyalty. They may not be aware of the range of policies that are available on the market or indeed those sold by their current insurer. So their trust and a lack of knowledge make them potentially vulnerable to detriment.

This is an issue the Association of British Insurers (ABI) and the British Insurance Brokers’ Association (BIBA) have highlighted in their joint Code of Good Practice. So it’s important insurers and brokers are alive to the needs and characteristics of their customers.

The FCA introduced requirements in April 2017 to improve the quality of information insurers provide at renewal. This includes requiring insurers, after the fourth annual renewal, to take extra steps to encourage their customers to shop around. However, the underlying principles of treating customers fairly are the same as they have been for many years.

New insurance products are usually offered at a discount, to attract new customers. Often this price is set at a level below the actual cost of the policy, with the insurer aiming to retain the customer and recover its initial discounts through subsequent renewal increases.

Typically, this is done over a number of years, but in some cases we see insurers continue to increase the premium even after the policy has become economic to provide.

After a number of years, it should normally be quite apparent to an insurer when a loyal customer isn’t engaging with them at renewal. If that customer hasn’t been told about other products available from the insurer, they may also not have had enough information to make an informed decision about whether to accept their renewal price each year.

This can lead to situations where insurers know some of their customers are paying more than they could have done for their insurance each year. At the same time, customers with similar risk profiles, often on newer products - but sometimes even the same product - pay significantly less.

Where insurers don’t address this inequality of knowledge, and help their more vulnerable customers, we may decide that they aren’t treating their customer fairly. When this happens, we’ll look at what a customer is paying for their insurance now and what they paid at the point when we think the insurer should have reasonably known their customer was susceptible to detriment. And we’ll assess what we think they’ve lost from that point onwards.

    Mr A, in his eighties, had been living with dementia for a few years. He didn’t use a computer, and his wife, who’d always taken care of the home expenses, had died about seven years before. So after this he’d asked the insurer to send things to him by post.

    Mr A’s nephew got in touch with us when helping his uncle out with his household finances. He’d noticed the home insurance for his uncle’s two-bedroom terraced home was £1,400. He’d found similar policies online for as little as £150. Indeed his existing insurer was quoting £300 for more comprehensive cover.

    He’d been with the same insurer for 15 years, originally taking out the policy for £200. The policy had automatically renewed every year and Mr A had never made a claim. Mr A’s nephew complained on his uncle’s behalf that the price of the policy wasn’t fair. He told us his uncle was very upset to think his insurer had taken advantage of his loyalty.

    In response to Mr A’s complaint, the insurer said the price was correct and that the quotes on their website were lower because of “online discounts”. Mr A’s nephew asked for our help to sort things out.

    how we helped

    When considering whether Mr A was treated fairly, we looked at whether he’d been given clear information when his insurance was due to be renewed. He needed to have been able to make an informed decision about accepting the price and cover offered.

    Mr A’s renewal documents were sent to him by post. And for the first four years the price had increased very little. In the fifth year, it went up by 15% and by similar amounts after that.

    The insurer’s renewal letters told Mr A that as a valued customer he’d received a number of discounts for making no claims and staying with them. But we thought the difference in price between Mr A’s policy and the online policies couldn’t be explained by the online discounts alone. The renewal letters also referred to other policies being available, but said that unless his circumstances had changed, Mr A didn’t need to do anything. Overall, we thought that the information he’d had at renewal could have been misleading.

    From what Mr A’s nephew told us about his personal circumstances and his lack of direct engagement, we thought it should have been clear to the insurer that Mr A might need additional help in making an informed choice about whether to renew his policy.

    We didn’t think the insurer had done enough to let him know there were other, potentially cheaper, options available. Increasing his price each year without taking into account Mr A’s needs had left him potentially susceptible to detriment. We thought that his vulnerability should have been apparent from the fifth policy year onwards. That was also when the price of his policy had begun to increase significantly, the original new customer discount having been recouped by then too.

    We told the insurer to refund the difference in premiums, with interest, for each year between the price paid after five years and the subsequent renewal offers. The insurer also accepted our recommendation to pay £150 for the upset they caused Mr A.
    Mr D took out home insurance when he bought his first home and had stayed with the same company for 10 years. As he did with other household costs, every year he’d called his insurer to ask if they could offer a better price. After six years, he was paying around £250, which he thought was good value.

    Four years ago, Mr D was promoted at work and longer hours meant he didn’t get around to calling his insurer. His home insurance automatically renewed. After seeing an increase in TV adverts about shopping around for insurance, Mr D compared insurance prices online again and was unhappy to see his insurer was offering a similar policy for £150, while his renewal offer was £500.

    He complained to his insurer who said he was paying the right price for his insurance. They said the policy on the website was priced lower because of a discount for new customers. So Mr D asked us to look into his complaint.

    how we helped

    We asked the insurer to explain the difference in price. It said that the discounts applied to new customer policies would no longer apply if that customer stayed with them.

    It was clear Mr D knew that he could shop around or talk to his insurer about reducing the price of his insurance at renewal. He’d already done this several times before. The insurer had not misled him in its renewal documents and had pointed out it had other policies that might be cheaper if he got in touch with them.

    Taking all the circumstances into account, we explained that we didn’t think Mr D’s insurer had treated him unfairly.
    Mrs L, a teacher in her 40s, took out a branded home insurance policy through a retailer she’d been loyal to for many years and felt gave good value for money. She’d had the policy for nearly 15 years, having taken it out at the same time as she bought her first house. It had always been underwritten by the same insurer. And it went up in price each year, but so did the value of her house.

    A colleague mentioned to Mrs L about saving money on their insurance using a price comparison website. Mrs L hadn’t thought she’d need to shop around for her insurance because she trusted the retailer. But when she checked online, she found a policy with the retailer’s branding, and from the same insurer, at about £1,000 less than she was paying.

    Mrs L called the number on her policy documents and spoke to the insurer to ask about the price difference. The sales agent said they could match the online price if she’d answer a few questions. After taking out the cheaper policy, Mrs L complained that she’d been overcharged for so many years. The insurer told Mrs L that the cheaper policy was a different product and both were priced correctly. So she asked us to look into this for her.

    putting things right

    Looking at Mrs L’s renewal documents, there was no mention of other policies being available. And the insurer had told her that unless her circumstances had changed, she didn’t need to do anything. Her policy would automatically renew and her direct debit would be increased.

    Around five years before, the insurer had introduced an alternative home insurance product for new customers of the retailer. The policy had a revised set of personal questions, which measured risk differently. But the insurer had never told Mrs L about the new kind of policy. Instead Mrs L had continued paying an ever increasing price for the renewal of her old insurance policy each year.

    Given her long-term relationship with the insurer, we felt it should’ve been aware Mrs L was unlikely to question her renewal premium each year. We thought the insurer should have done more to keep Mrs L informed about her options. And that she’d lost out because it hadn’t taken into account her needs or given her appropriate information at renewal to allow her to make an informed decision about accepting the policy at the price offered. If she’d known about the other policy, we thought she’d have moved on to it.

    We told the insurer to refund the difference between the premiums Mrs L had been paying and what she would have paid if she’d taken the new type of policy shortly after it was introduced. To that we added 8% interest.

How do customers know if they are paying a fair price for their insurance?

For many people, the price of an insurance policy is the major deciding factor when buying insurance. Understandably, no one wants to pay more than they have to for insurance. But customers still need to make sure the policy is right for them.

Insurers are required to give their customers clear information about the products they have and the price they are offering for the cover. But, if customers don’t properly understand what they’re buying, then problems can still arise.

It’s not our role to determine the fair price of insurance policies. But when someone tells us they have been misled about the price of their policy, or what it covers, we’ll ask the insurer about what it did to ensure the customer was sufficiently informed when they took out or renewed the policy. And where we decide that the customer wasn’t given the right information about their options, we’ll ask whether the insurer could have done more.

    Miss N, who was a retired nurse in her 70s, had been with her insurer for 12 years. After a chat with her niece who just lived at the top of her road, she found out she was paying a lot more for her home insurance with the same company. Miss N complained to her insurer that she was being overcharged.

    The insurer told Miss N the cost of her insurance took into account claims she had made and the risk of flooding where she lived. It said the price was correct. Miss N couldn’t understand why her niece, who lived on the same road, and who had also made a few claims over the years, would pay so much less. So she asked us to help sort things out.

    how we helped

    When we reviewed Miss N’s records, we saw the price of her insurance had gone up by about £100 each year. She told us she’d never contacted the insurer after receiving the renewal offers - because she trusted they were giving her the cover she needed at a competitive price.

    We saw she’d made three small claims. The last claim was for damage to her drive and front garden following a flood from a local stream. The insurer explained it had changed its risk rating system since Miss N had first taken out her policy. On the new system, postcode information showed Miss N’s house was at a much higher risk of flooding than her niece’s, which was just outside the risk area.

    The insurer told us Miss N’s risk had increased significantly some years ago, before her claim for flood damage. This meant her price should have been much higher. But her policy had a cap on the amount the premium could increase by every year. She’d actually got a much better deal than the insurer would have offered a new customer.

    We accepted that the information the insurer gave Miss N at renewal could have been presented in a clearer way. But we didn’t think she’d lost out as a result of this, given the policy pricing had fairly reflected the risk of her needing to make a claim. So we explained to Miss N that we didn’t think her insurer had treated her unfairly.
    Mr G complained to his insurer about the increased renewal price for his car insurance. When the policy renewed, there was an unresolved claim on the policy. But Mr G thought this shouldn’t affect his price, as he had protected his no claims discount (NCD) for the policy. He thought this also protected the price.

    The insurer told Mr G that his no-claims discount hadn’t been affected by the claim. And this wasn’t the reason for the increase. The insurer pointed out that neither Mr G nor the other driver involved in the claim had accepted responsibility for the incident. Because it couldn’t yet be proved who was to blame, both parties were being treated as equally at fault.

    The insurer told Mr G it was this open “fault claim” that had affected his price, though if the claim was resolved later, the insurer would correct his premium.

    Mr G didn’t accept his insurer’s explanation and brought his complaint to us to look into. Mr G felt the insurer had treated him unfairly, by charging extra to protect his no-claims discount and then increasing the price of his insurance after the claim.

    how we helped

    We asked the insurer for a breakdown of the price increase. We also asked for an explanation of how the no-claims discount affected the price Mr G was paying for insurance.

    The insurer was able to show that Mr G had been given the maximum discount available, from the first year he had taken out the policy. Because Mr G had chosen to pay more to protect this discount, it didn’t reduce when he reported the claim.

    We explained to Mr G that the unresolved claim was the reason for the increase in his premium. As neither driver was prepared to accept responsibility, and no other witnesses were present, the insurers had acted fairly by holding both drivers responsible.

    A “fault claim” doesn’t necessarily mean that the customer was to blame for the accident. It can also mean that the insurer hasn’t been able to recover what it’s had to pay out in repairs.

    Because of the fault claim against his policy, Mr G’s premiums had increased significantly. But the insurer showed us the increase was the same as they would have applied to any other customer, in the same circumstances.

    We understood Mr G’s frustration at the increase. But we told him that protecting a no-claims discount wasn’t the same thing as protecting the price of his insurance. We explained that it was fair for an insurer to increase the price of the policy, if its view of the risks involved changed.

    Because he had protected his discount, we thought it was likely Mr G had paid less than he would have if he had a reduced discount or no discount at all. As the insurer was also prepared to review the premiums again, once the claim was resolved, we didn’t think their pricing was unreasonable.
    Mrs C had arranged her pet insurance with her broker for a number of years. When she moved to a new home, across the road from her previous address, Mrs C called her broker to update her details. She was surprised when the broker charged a £10 administration fee, and increased her premium by nearly £50. The broker told Mrs C that if she didn’t accept the additional premium, she could cancel the policy, but would need to pay a £30 fee to do so.

    Mrs C wasn’t happy with the broker’s decision and asked for our help. She told us that after complaining to her broker, it had said the fees charged were correct and it was entitled to apply the additional premium.

    how we helped

    We spoke to the broker and asked it to show us why the premium had increased. The broker told us it had made a mistake with the price increase. It confirmed there had been no additional premium charged by the insurer for the change of address. But the commission rate the broker received for the policy had changed mid-term. So when Mrs C notified them about her house move, the higher rate was applied.

    We accepted the broker was entitled to charge a reasonable fee reflective of the work required for changing or, if necessary, cancelling a policy – as long as these were made clear to the customer upfront. But we didn’t agree it was fair for the change of address to be used as an opportunity for it to earn further commission, particularly when there was no actual change in the risk posed to the insurer.

    We told the broker to refund the overpayment, with interest. It had also taken the broker far too long to tell Mrs C it had made an error after she had queried it. And Mrs C had gone to some trouble to get things sorted. So we also told the broker to pay Mrs C £100 compensation to recognise that.

How do insurers calculate the price of a policy?

Pricing an insurance policy can be very complicated. Advances in technology now mean underwriters can access more information than ever before. They can identify risks far more accurately to help them price individual policies.

Like any business, an insurer has to think about its costs and profit margins to remain sustainable. A customer may expect a simple explanation for a price increase. But for an insurer, there may be hundreds, or even thousands of variables it has to consider when setting a premium – including its own commercial requirements.

Major events can have a significant impact on how an insurer assesses risk. For example, the rise in expensive flood claims in recent years caused many insurers to review their approach to offering flood cover, and many customers found it difficult to find affordable cover.

This led to the introduction of Flood Re, a government backed reinsurance scheme that helps mitigate insurers’ exposure to flood claims, in return for a fixed premium which is passed onto customers.

    When Mrs Q asked why the price of her buildings insurance had increased so much, the insurer advised she had made two claims in the last five years. This had led to the underwriter viewing her policy as a higher risk.

    Mrs Q disputed this, saying she’d withdrawn one of the claims – which was for storm damage – and so this shouldn’t be considered against the policy. The underwriter didn’t agree, as although a claim hadn’t been paid out, the damage had occurred and this had to be taken into account in its calculation of risk.

    The underwriter maintained the renewal premium was correct. Mrs Q asked us to look into the reasons behind the increase, as she didn’t think her insurer was treating her fairly.

    how we helped

    We asked the insurer for the evidence of its calculations for Mrs Q’s renewal premium. From looking at this, we were able to establish the withdrawn claim for storm damage had played a part in the increase. But it wasn’t the main reason for the increased cost.

    The year after the withdrawn claim, Mrs Q had made another claim with her insurer. This time the claim was for flood damage to her home. As a result of this, the underwriter had that year passed on some of its liability for using the Government’s “Flood Re” scheme.

    The insurer was able to show that it hadn’t applied any rating for the flood claim, but instead it had applied the fixed premium, which had been set by Flood Re, as part of Mrs Q’s renewal price.

    We explained to Mrs Q that the insurer had followed its normal process, in order to continue cover after the flood claim. The insurer wasn’t responsible for the additional premium Flood Re had charged. So we didn’t think the insurer had acted unfairly. But we pointed out that it would have been helpful if the insurer had explained this to Mrs Q when she’d first queried her premium increase.

Image: ombudsman news 144

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.