Forgotten insurance deals show how little customers understand policies, says SAM BARKER

What if I told you that some of the most common financial products are hidden insurance policies that most people don’t know they’ve got – and which are used as little as every 664 years?

Sadly this is just one of the murky corners of the insurance world, and one which weaponises our lack of understanding against us. 

But this latest finding, from Financial Conduct Authority figures, also strikes right at the heart of a crucial subject that is costing consumers money: when it comes to insurance do the public really understand what they are buying and what it does? All too often, the answer is a resounding ‘no’.

Let’s start by delving into the example above. 

You can divide consumer insurance policies into two rough groups: high-profile and low-profile. In the high-profile group are things the average person is very familiar with, like home, car, travel and pet insurance.

In the low-profile group are more niche products that are sold in the millions as smaller policies, both individually and as add-ons to more well-known and understood insurance deals.

But many low-profile policies are almost never claimed on, according to figures from the FCA. 

Taking one product as an example, just 0.16 per cent of personal accident cover policies, sold as an add-on to motor insurance, are claimed on every year. That means, on average, someone with this insurance claims once every 664 years. 

And there are millions upon millions of low-profile deals out there. Around 3.5million Brits have personal accident cover, for starters, paying £30.8million a year in premiums.   

Policies ARE worth it… if you make a claim 

But here’s the thing. Despite the lack of claims, many low-profile insurance deals are in theory quite useful, because when consumers do claim they almost always pay out.

Take personal accident cover. Yes, only 0.16 per cent of policies are claimed on a year. But when they are, the product pays out 96.57 per cent of the time. 

But in practice many of these deals are totally useless because the buyer is unaware of what they’ve bought, have forgotten about it or just had no use for it in the first place.

Do we really understand what we’re buying?

This example speaks to a wider problem with insurance, namely that much of it is hard to understand.

We buy things because we want them to do a job, and the job of insurance is to pay claims. But a quirk of insurance is insurers can deny that job – paying claims – on the basis that consumers did not understand the nuts and bolts of what their insurance policy covered when they bought it.

That is pretty unique. If I buy a toaster, that toaster’s role is to make my breakfast. I don’t need to understand the electrical circuitry inside it, and the toaster manufacturer doesn’t expect me to. 

In other words, that toaster is designed around my ignorance, but insurance isn’t.

Also, if I buy a toaster, I know I’ve bought it. FCA figures suggest the same cannot be said for some insurance deals.

This is an issue because insurance demands understanding in a way other products don’t, while at the same time being far more complicated. 

For example, home insurance policies, at their wordiest, have been clocked at 20,000 pages long – that’s pages, not words. How can we be expected to fully understand something even half that length? And then keep that perfect understanding until the time we need to make a claim? Then what happens if we then opt to buy separate add-on insurance alongside it?

Then factor in that you can buy all of that online in under five minutes, as millions of us do every year. We never had a hope in hell of understanding some of this stuff, or even remembering we bought it in the first place.

Knowledge gap: Plenty of insurance deals can be bought online in minutes – but too often, customers don’t fully understand what they are getting 

What does it take to change this catch-22? 

This combination of insurer complication and apathy from customers creates a system full of blind spots. One of those blind spots is the one detailed above: that consumers can buy a deal and apparently never even know about it.

That catch-22 situation will continue to trip consumers up until we can work out a way of resolving it. 

Enter the regulator, which has been rapping insurers’ knuckles over this issue for almost a decade. 

The FCA has been trying to to tackle the questionable value of some add-ons as far back as 2014 – in fact, it was the first major piece of work the FCA did.

At the time, the FCA found that ‘selling a product as an add-on often led to consumers purchasing products that were of poor value and not what they needed’. It also found that ‘the value of general insurance products is not always clear’.  

In 2016 it brought in rules saying customers have to actively choose to buy an add-on product. Then in October 2022 more FCA rules came in meant to tackle add-on insurance being over-priced for the value it brings.

And there are more rules coming. 

From this summer, FCA-regulated insurers will have to stick to a new set of rules called Consumer Duty. These mean insurers can be hammered by the FCA for selling policies consumers do not understand, or which do not meet their needs. Insurers and brokers will have to make sure customers are making properly informed decisions about what they buy.

This Is Money understands the FCA could also take another look at low value insurance deals in the future too.

>> Some major insurers reject almost HALF of all home insurance claims: These are the firms most and least likely to pay up 

What needs to happen

In short, all this regulation means insurers are meant to make sure customers know what they are buying, and are actively choosing to buy it. 

That is a lovely idea. But understanding many insurance deals, really understanding them, is next to impossible. 

And, in practice, that ‘active choice’ boils down to a tick-box on a website or reading a load of insurance bumph that consumers almost certainly won’t engage with.

The problem is clear. What is harder is coming up with a solution to a problem that has been rumbling on for years. 

To my mind, either insurance and the process of buying it needs to be clearer, or consumers need to live with the consequences of not understanding it. The latter is unthinkable, so that just leaves the former. 

Perhaps insurance deals need to be designed to be simpler, as some insurers are already doing, to their credit. Designing insurance more like toasters, you might say.

Or maybe we need to bite the bullet and accept that we need to spend longer buying insurance to make sure we have the best grasp of it possible. 

That would require somehow unpicking our cultural tendency to treat insurance as an annoying grudge purchase – no small task.

What cannot continue is the widespread practice of insurers charging consumers for policies they only use once or twice every millennium.