We've created a league table of insurances that shows which are good value for money, and which are the rip-offs!
As much as we hate paying for insurance, from my experience in the industry, I believe that the insurance market usually works surprisingly well (but not when lawyers get involved, when I think it works incredibly badly). If it's working well, it means that it is competitively priced and insurers are paying for the majority of claims.
I know it all seems like a rip-off, but where this happens it's often simply because it costs insurers a lot to deal with claims, or because they get lots of claims.
However, some insurances are not fairly priced and are exceedingly profitable. Disgustingly so, in fact.
My favourite measure of how much insurers are ripping us off (or not, as the case may be) is the claims ratio. This tells you how many pennies get paid out in claims for each pound taken in insurance premiums. If, for every £1 taken in premiums, 60p is paid out in claims, the claims ratio is 60%. The higher the claims ratio, the better value-for-money we're getting.
It's not a perfect measure, as it doesn't take into account other expenses that your premiums pay for, such as staff costs and heating. Even so, a low claims ratio is an excellent indicator of where rip-offs are almost certainly occurring.
Unsurprisingly, therefore, the industry makes it very hard for the public to find claims-ratio figures, but over the past few months I've pieced together what I could from scraps of data. The result is the following league table of insurance:
The Fool's Insurance League Table
(Remember, a higher % is better)
Type of insurance | Claims ratio |
|---|---|
| Life insurance | 110% |
Health insurance* | 80% |
Motor insurance | 78% |
Pet insurance** | 72% |
Travel insurance (not sold | 67% |
Accident and health | 65% |
Income protection (& other) | 57% |
Home insurance | 54% |
Extended warranties**** | 43% |
Pecuniary loss insurance | 34% |
Payment protection insurance* | 19% |
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Sources:
-- Unless I've put an Asterix (ok, asterisk!) next to it, all the above data was calculated from figures in the Association of British Insurers' Statistical Overview of UK Insurance, published on September 2007. These figures are for 2006.
* Office of Fair Trading's Payment Protection Insurance report, October 2006. Figures are for 2005. The health insurance (aka 'private medical insurance') figure comes satisfyingly close to my previous estimate in Private Medical Insurance: Is It Worth It?
** FSA's ICOB Review Interim Report, March 2007. Figures are for the period 2001 to 2005.
*** Datamonitor's UK Travel Insurance 2005. This figure is for 2004.
**** Outstanding Companies Digest, Issue 01 2007. This figure is based on the claims ratio in 2007 for Domestic & General Group, the leading provider of warranty protection for domestic appliances.
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About the winner
Life insurance is the clear winner. With a claims ratio of 110%, this means that, in 2006, life insurers paid out £1.10 for every £1 it took in premiums. The reasons for this are extremely complicated, but it shows that the average life-insurance policy is certainly looking awesome value-for-money at present.
However, this claims ratio won't last forever. All insurances go through cycles which see insurers, sometimes, paying more in claims and expenses than they receive in premiums. But don't worry for the poor insurers; they will still have made a profit from life insurance that year through their investments.
About the next top three
Health insurance and motor insurance come second and third, with 80% and 78% respectively. The claims ratios fit nicely with other evidence that these insurances are excellently priced, on average. In fact, car insurers have paid more in claims costs and expenses costs combined than they've received in premiums for the past 12 years! Again, don't worry, investments and clever strategising will have kept their shareholders happy.
Now, the pet insurance figure of 72% is an anomaly. On the whole, pet insurance has lots of exclusions that prevent you from claiming, which has even caused vets to comment on it. Looking closely at the source of this figure**, we find that it is based on just the two insurers prepared to submit figures to the FSA! The FSA didn't make supplying the figures compulsory so, if this insurance is as over-priced as we at The Fool think, that explains why the majority of insurers were unwilling to help out.
The next four
The figure for travel insurance is fairly reasonable at 67%, which is its best ratio for at least ten years. However, that figure excludes travel insurance sold through travel agents. It is much more expensive to buy travel insurance through agents, so their claims ratios would no doubt be a lot worse.
I've so far been unable to get a separate claims-ratio figure for accident insurance. I can get accident and health insurance combined, which comes to 65% in my table. However, as health insurance is around 80% by itself, this means accident cover must be significantly lower than 65%, making it at best expensive, at worst a rip off.
This tallies with other evidence. Accident insurance is often given away free, so it can't cost all that much in claims.
In the time I had, I couldn't separate income protection and 'other', but I'll work on that for next time. I suspect that income protection insurance keeps the claims ratio high compared with these 'others', which were lumped together by the Association of British Insurers.
Many people these days find that their home insurance claims are turned down. By more aggressively rejecting claims, insurers have driven the claims ratio down from 72% in 2000 (from FSA's ICOB Review Interim Report, March 2007) to just 54% in 2006. Over-priced insurance cross-sold by mortgage companies is also a big factor. It's clear a problem needs to be addressed here. But not as urgently as the next three...
About the bottom three
I was very pleased to uncover a claims-ratio figure for extended warranties, which is 43%. On the downside, as you can see from my four comic-book characters (****), this figure is from just one provider, although it is a big one that provides warranties for many manufacturers. Also, it's just for domestic appliances, not other goods. As extended warranties have not been regulated by the FSA, we have difficulty finding more details.
Still, 43% is very low. We know that extended warranties are expensive through other means, so this figure is yet more evidence for the pile. I also discovered that the OFT has seen claims ratios from more than one provider. Although it won't reveal what the ratios are, it says: 'Based on the low claims ratio for extended warranty products, we have reason to believe extended warranties may be typically sold at considerable profit.' (OFT: Extended Warranties On Domestic Electrical Goods, July 2002)
'Pecuniary loss' next. This covers a number of insurances, such as business-interruption insurance.
But don't worry about what all these expressions mean. The pecuniary loss insurance that concerns us consumers is mortgage indemnity insurance. This cover protects the mortgage company if your property is sold for less than the amount of the loan. You may be more familiar with its latest name: the higher-lending charge. (Many of the stinkier financial products change their names regularly to disguise themselves.)
It's already bad enough that we are forced to pay this Massive Mortgage Swindle, but the low claims ratio makes it even worse.
It's no surprise that payment protection insurance (PPI) is last. This cover protects your loan, mortgage and credit-card repayments in case of sickness or unemployment. I shall not go into the details, because writer Cliff D'Arcy has been campaigning about this cover for years. (Read Reclaiming Rip-Off Insurance Premiums.) However, I will add that whilst researching this article I found that the claims ratio for PPI on secured loans is just 10%*. Eep!
Looking again at the table, we can see that it is insurances that are usually sold as optional extras that cost the most. Payment protection insurance is sold with credit, mortgage indemnity insurance and home insurance are often sold with mortgages, and extended warranties are sold with all sorts of goods. So be particularly wary of cross-selling!
Other insurances on the radar
Sadly, I couldn't find data on mobile phone insurance. I'll keep searching, and I will find it. However, it's clear from other evidence that the claims ratio must be staggeringly bad when you buy the insurance direct from your own network provider. I wrote about it in Mobile Phone Insurance Is A Rip-Off!
We should be worried when we can't find claims ratio statistics at all, and I can't find one for critical illness insurance either. I am determined to uncover it at a later date. These policies have heaps of exclusions that will, if insurers so choose, make it easier for them to reject more claims whilst maintaining higher prices.
I hope to add both of these insurances to my league table next time.
Should we ditch the rip-offs?
We're all different and we have different needs. Some insurances are unavoidable, even if they are a rip-off. And some of us are more accident prone than others, so we must take that into account on an individual basis. But there are things we can do to reduce our costs:
- Obviously compare prices to get better deals. That will mean your own claims ratio is better than the average.
- Don't just compare price, compare the small print. Read (and understand!) the terms and conditions of several policies to see how good the cover is. Think about what level of cover is important for you. We have a lot information all over our site that will help you to understand what you're reading.
- Finally, consider not buying the insurance in question at all. Instead, put more money into a savings account.
Any insiders who can shed a light on claims ratios for breakdown cover, ski insurance, mobile phone insurance and critical illness insurance, please get in touch by emailing me. (To do that, click on my name at the top of the article.)
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