Consumer Insurance (Disclosure and Representations) Bill [Lords]

Christopher Chope Excerpts

Tuesday 6th March 2012 Commons Chamber

[Stephen Phillips]

My hon. Friend makes a valid point. The insurance industry has long been regulated and the ombudsman has long been able to make declarations, but there are circumstances in which one cannot go to the ombudsman—for example, if the financial value of the contract is too high. There are circumstances in which the ombudsman will not intervene—for example, if legal proceedings between the consumer and the insurance company or, if Lloyd’s, some other insurer, are already afoot. In addition, experience dictates that the financial ombudsman is not, for example, particularly au fait with some of the more obscure parts of insurance law with which the Bill grapples, such as those parts of common law that deal with basis clauses and the turning of representations into warranties when made the basis of the contract.

I hear, then, what my hon. Friend the Member for Cardiff North (Jonathan Evans) says, but it is fair to say that the Bill is not only welcome but contains proposals that the Law Commission has properly considered and requires no review of the type that the new clause contemplates. For those reasons, the new clause is, in my respectful view, misconceived; and for those reasons, I am sure that the hon. Gentleman will not push it to a vote.

[Mr Christopher Chope (Christchurch) (Con)]

I was rather attracted to the new clause tabled by the hon. Member for Nottingham East (Chris Leslie). The idea that the House should engage in post-legislative scrutiny is a good one and accords with good legislative practice. That, effectively, is what he is saying. He is not saying that the House would necessarily be involved; he is saying that the Treasury, the Department sponsoring the Bill, would have an obligation to assure everybody about the impact of legislation. This could be an important precedent. Perhaps, in due course, it will be part of official Opposition policy to provide for post-legislative scrutiny.

This area of insurance is extremely complicated and, as the hon. Gentleman said, very expensive for many people. The reason it is so expensive is that there is an enormous amount of fraud, particularly in relation to motor accidents. We heard recently about the high incidence of claims for whiplash. Almost everybody involved in even the most minor bump is encouraged to claim on their insurance for whiplash injuries, and invariably the insurance companies end up paying a lot of money to prevent what they would describe as nuisance claims from going to full litigation. Effectively, they are held to ransom, and not surprisingly it is the customers of those insurance companies who end up paying the bill through higher premiums.

That situation is particularly pernicious with compulsory insurance, which motor insurance is—third party, fire and theft, and so on—for people seeking to drive a motor vehicle on the road. It is particularly tough on young people, and has been made tougher by this ludicrous European legislation declaring that insurance companies cannot take account of whether a young girl belongs to a class group with a lower claims rate than a young man who belongs to a group with a higher claims rate and who therefore will face additional costs.

As a consequence, the premiums for young women have increased significantly faster than premiums for young men. I suppose I have a family interest, because my daughter has recently acquired her first car and taken out her first insurance policy. I can reconfirm what the hon. Member for Nottingham East said. Obviously, she did not have a no-claims record, because she did not have any driving experience, and in the end, the best deal was from a company offering her 10 months’ insurance, which gave her the prospect of getting a no-claims discount after 10 months rather than after a year.

[Jonathan Evans]

There might have been another reason for the 10 months: the European decision to which my hon. Friend referred comes into operation in 10 months' time.

[Mr Chope]

My hon. Friend is ahead of the game. I was interested in his earlier intervention declaring his knowledge and experience of one particular insurance company—a company from which we sought a quote but which was extremely reluctant even to consider providing insurance cover at a reasonable price. The reason was that it did not want to engage in this market and had recently changed its policy. It is a pity that this mutual insurance company has decided that the pressures are such that, even for long-standing customers, it is not prepared to take on, at a reasonable price, the sort of risk to which I have referred.

It is easy to go unnecessarily wide on such an issue—perhaps I was led astray by the hon. Member for Nottingham East because of the width with which he introduced his new clause. However, I look forward to hearing the Minister respond to the idea of post-legislative scrutiny. Perhaps, Mr Deputy Speaker, if she could fit that point into the scope of her response to this short debate, she will say whether it might become Government policy to make post-legislative scrutiny the norm rather than the exception. I hope, at least, that she will come forward with some strong and persuasive arguments so that I do not have to join the hon. Gentleman in the Lobby in support of new clause 1.

[Mr Deputy Speaker (Mr Nigel Evans)]

That probably goes too wide for this particular debate. I call Chloe Smith.

--- Later in debate ---

[Chris Leslie]

Indeed, that is the very nature of the measure, but that does not mean that, in the course of changing the disclosure requirements, we should not try to frame the duties that insurers have to abide by. I do not know whether hon. Members have visited moneysupermarket.com or confused.com recently. They are aggregator websites on which a number of insurance companies share the questions that people have to answer in order to take out an insurance contract. The websites show the range of insurance contracts that are available. Quite honestly, I think that the way the aggregator companies will deal with the Bill is another matter, but I challenge any hon. Member to say that their boredom threshold has not been reached after they have filled in 15 or 20 pages of a form. Having said that, I think that many hon. Members—especially those who are in the Chamber at the moment—must have particularly high boredom thresholds. I know that from many hours of experience in these debates. Notwithstanding that propensity to sit through long, technical discussions, however, I believe that form-filling is quite a different matter.

My point is about the administrative burden in relation to new contracts. I want us to ensure that we protect the section of society that I have been describing. I can envisage us all being visited at our surgeries in the years ahead by constituents telling us that they did not take out insurance not because of the cost but because the form-filling was just too much for them. They will tell us that they regret that, but that there were just too many questions to answer. I hope that the Minister understands why I have framed the amendment in this way. It is an important provision, and I hope that she will address it.

[Mr Chope]

The hon. Member for Nottingham East (Chris Leslie) has again done the House a service in raising this issue. He has spoken of the need for proportionality. I disagree with the way he has worded his amendment, however, as it is rather hard in law to place a duty on an insurer to “show regard” to a principle. Given all the other qualifications in the amendment, it would, in practice, by unenforceable.

[Mr Greg Knight (East Yorkshire) (Con)]

Is the hon. Member for Nottingham East (Chris Leslie) not making rather heavy weather of this matter? Will not the market take care of it? If one insurer on its own presented reams and reams of questions, and the others did not, surely the potential customer would simply go elsewhere.

--- Later in debate ---

[Mr Chope]

My right hon. Friend anticipates my next point, which was to say that this should be, and will be, sorted out in the marketplace. Perhaps a new company called Simple Insurance could be formed—if no such company already exists—with my hon. Friend the Member for Cardiff North (Jonathan Evans) as a director. It could promote itself on the basis that it would ask just a few easily answerable questions that would not prove too burdensome. I agree with my right hon. Friend that that would be a better way of dealing with this matter. However, the amendment underlines the fact that many of the forms are far too complicated and intimidating, to the extent that people often tick all the boxes without looking at the small print. That is how many of them get into difficulties. These forms are often not filled in by the persons themselves but by somebody on the end of a telephone. Again, that can lead to difficulties of language or understanding. It is not just my hearing that sometimes makes it difficult for me to understand what people are saying on the other end of a phone when they are seeking information. There are some important issues here, but I do not think that the amendment has proposed the right solution to the problem.

[Miss Chloe Smith]

I shall answer a few questions. On this amendment, I am indeed with my hon. Friend the Member for Christchurch (Mr Chope) and my right hon. Friend the Member for East Yorkshire (Mr Knight), as I believe that the market will assist us in this area. I shall deal with the amendment principally on that basis.

The amendment, as hon. Members will have seen, would create a duty for insurers to make disclosure requests that are proportionate to the benefits generated. Following discussion in Committee, we return to the issues today; I hope I shall be able to add to what my colleague, the Financial Secretary said there.

There is no disagreement with the principle that the burdens on consumers should be as light as possible. That applies to the group of consumers mentioned by the hon. Member for Nottingham East (Chris Leslie) and, indeed, to all others who wish to purchase insurance. As the amendment rightly recognises, there is a balance to be struck between burden and benefit. The Government believe this balance is best struck by the Bill as it stands, with commercial pressures operating as a factor in that case.

I shall recap those points shortly, but I want to set out some background information on the types of questions currently asked, as I know Members were interested in that topic in Committee. They were particularly interested in the average number of questions asked when consumers enter into different types of insurance policy. I was able to take only a rough look at such things, but for some current policies it can take about 13 to 18 questions to underwrite home insurance and 12 to 18 to underwrite motor insurance. Requirements linked to these straightforward, mass-market products do not on this rough measure appear to be at all excessive. Simply counting questions, however, rather misses the point.

If insurers asked only a single question, this would be far more burdensome for consumers. I think it is much easier to answer a series of short, targeted questions—and this Bill sets out that they must be specific and clear—than it is to answer a single general question like “Has anything changed?” or “Is there anything I need to know?”

The Law Commission undertook a more sophisticated analysis of burdens on consumers, which was contained in its first discussion paper and has informed the development of this Bill. It discovered real problems in 2007 with the questions being asked in life and critical illness insurance. For example, one insurer asked, “Have you had any physical defect or infirmity, or is there any ailment or disease from which you suffer or have suffered or to which you have a tendency?” This seems impossibly difficult to answer and appears to require the consumer to begin at birth and work through every single visit to the doctor. Yet that might qualify as proportionate under this amendment because it is only one question. Reassuringly, there have been significant moves in this sector to improve the questions since 2007. The design of this Bill will further promote this improvement.

It is worth explaining briefly—I think the hon. Member for Nottingham East referred to this earlier—that different consumers face a different set of questions in order to purchase a similar policy by virtue of the channel they choose, whether it be through an aggregator, by telephone or face to face in a broker’s office. There is a need for insurers to tailor the requests they make in these different ways.

The burdens placed on consumers form the nub of the issue, and there is evidence that insurers already pay careful attention to those burdens. It has already been argued tonight that this is partly driven by market pressure, so let me add to those arguments. Clearly, a consumer has the choice to purchase from an alternative provider if disclosure burdens are too high. Indeed, some insurers have advertised products on the basis that they are easy to purchase. Comparison sites consistently study these drop-off rates and try to make the process as easy as possible.

It strikes me that no business wishes to run the risk of losing a customer entirely—the scary scenario that the hon. Member for Nottingham East has set out. No business would wish to do that because it would represent the loss of a customer. We hope that no consumer would wish to be in that position, as they would not then get the security of the product that they are looking for.

There are, of course, some savings to be made for insurers who get the right balance between getting the information they need and making it easy for consumers to purchase their product. The cost of asking another question is not insignificant, and insurers are well aware of that when they design their questionnaires. I refer the House to a PricewaterhouseCoopers report in November 2007, which considered the financial impact of the Law Commission’s insurance project as a whole. It estimated that increasing underwriting by two to three minutes per policy would equate to up to an extra £3,600 per 1 million of gross written premiums—equivalent to around an extra £150 million spent in the UK general insurance market alone. That does not include other costs associated with asking more questions, such as for the gathering and processing of the data. It is clear that there is a strong existing incentive for insurers to ensure proportionality.

I shall deal briefly with the Bill’s other provisions, in case Members do not already find the arguments about market pressures compelling enough to rely upon tonight.

Two further features of the Bill mean that if insurers impose burdens on consumers, they might undermine any right they have to refuse or reduce a claim. Under clause 4(1)(b) an insurer is not entitled to a remedy unless they can show that a consumer’s misrepresentation induced them to enter into the contract—at all or on its current terms. As a result, the Bill creates no benefit for insurers if they ask questions to seek answers on which they would not need to rely. Furthermore, under clause 3, a long and complicated questionnaire might have a bearing on whether a consumer has taken reasonable care not to make a misrepresentation. Insurers are at greater risk of having to pay claims, despite not having been given the correct information, if they make things difficult for the consumer. So in my view, there is no danger that the Bill will place extra burdens on consumers—as a result of those two measures in addition to the market forces mentioned earlier. Our impact assessment does not expect the Bill to result in significant changes to the questions asked by insurers. Rather, the Bill brings the statute into line with existing best practice and regulation. It is fair to say that we are updating the law, not altering the approach of insurers.

I do not believe that it would be beneficial for this Bill to go further than it does by seeking to change practice by prescribing the content and number of insurers’ questions. If we were to prescribe or limit the information insurers were able to seek, it might even increase premiums. Let us take, for example, the recent European Court of Justice ruling—one hon. Member has already referred to it—on the use of gender in insurance pricing, which shows that limiting the risk factors that insurers can use will increase the average cost of insurance.

Creating a duty for insurers in primary legislation would not be the appropriate solution. We continue to work closely with the insurance industry on this issue and with consumer groups on a range of issues. Where there are specific concerns about practice in certain parts of the market, the Government have worked with the industry on guidance. Accepting this amendment and creating a provision is unnecessary. It will throw out the careful balance in the Bill, and it is not the most effective way to make sure that consumers do not face excessive burdens. I therefore ask the hon. Gentleman to withdraw his amendment.

--- Later in debate ---

[Mr Chope]

On a point of order, Mr Deputy Speaker. It has now gone eight o’clock. In an act of indulgence, a number of us allowed the Government to remove the normal constraints on private business so that the three hours allotted to it could begin later than 7 pm. However, it seems to me that, given the prospect of a reasonably lengthy debate on Third Reading of the Bill that we have been discussing, it is open to the Government to adjourn the Third Reading debate until another day, so that the three hours allotted to the private business can proceed immediately.

[Mr Deputy Speaker (Mr Nigel Evans)]

That is not a matter on which the Chair can intervene. It is a matter for the Government’s business managers to consider.

Third Reading

[Miss Chloe Smith]

I beg to move, That the Bill be now read the Third time.

I shall do my best to be brief but comprehensive. I think that Members on both sides of the House can agree that the current law relating to pre-contractual disclosure and representation in connection with consumer insurance contracts is unreasonable. I think we can also agree that the alternative practices favoured by regulators and insurers, although not always consistent, give the consumer far better protection from the unreasonable refusal of claims. The Bill updates the law to reflect what has rightly become market practice, and in doing so it clarifies the duties of consumers and how they can expect to be treated by insurers.

On behalf of my hon. Friend the Financial Secretary to the Treasury, who began the process, I thank all Members who have spoken during the Bill’s passage and who have, without exception, recognised that it constitutes a valuable and much-needed updating of statute. We also owe thanks to the Law Commissions, whose joint report on the issue and extensive work has produced a Bill that implements this change with the backing of a wide range of consumer groups, as well as that of the industry and regulators.

The drafters of the Marine Insurance Act 1906, if they are still with us, will not have envisaged the ways in which consumers currently purchase insurance cover for such purposes as their homes, their cars or their health—or their llamas. They will also not have envisaged the existence of the comparison website, and the way in which it requests information from consumers.

In October 2010, a letter with a range of signatures was sent to The Times in support of the Bill. It described the current law as designed to

“govern face-to-face commercial insurance deals in the coffee houses of Georgian London.”

The 1906 Act is not suitable for the modern insurance market, especially as it contains harsh penalties for reasonable failures to disclose or accurately represent information by those purchasing insurance. The Bill replaces the current burdensome duty requiring the consumer to provide all information that might influence the judgment of a prudent insurer with a requirement for consumers to take reasonable care to answer the insurer’s clear and specific questions. It also makes penalties for non-disclosure or misrepresentation proportionate, rather than allowing the insurer to legally void the contract in all cases. Consumers have been protected by the Financial Ombudsman Service—which has been applying those proportionate remedies for some time—as well as by market practice and Financial Services Authority rules, but there are real benefits in aligning the law with that practice.

In some circumstances, the different legal and regulatory positions cause problems for both industry and consumers. At present, the FOS receives about 1,000 complaints a year about non-disclosure and misrepresentation. About half the insurers’ decisions are upheld, a figure we would expect to be much higher if there were sufficient clarity about the rules. That indicates that insurers find it difficult to locate and interpret the relevant rules.

We believe that those two key provisions—the change in the duty of the consumer and the provision of a proportionate rather than a harsh set of remedies for the insurer—shift the balance of the law in favour of the consumer. Some parts of the Marine Insurance Act are heavily biased in favour of insurers, and the Bill attempts to rectify that bias.

[Mr Chope]

Has my hon. Friend or her Department produced any estimate of the likely reduction of the burden on the Financial Ombudsman Service?

[Miss Smith]

Some estimates have been made, and I believe that my hon. Friend will find some of them in the impact assessment, but I am sure that my hon. Friend the Financial Secretary will be happy to deal with the point in more detail.

The Bill takes a high-level approach, updating the principles set out in law to bring them into line with good practice rather than attempting to set out prescriptive detail. That should help to prevent the law from becoming outdated again as market practice develops.

I hope that Members will accept the advice of consumer representatives who wrote to the Committee—including Age UK, the British Heart Foundation, Consumer Focus, Macmillan Cancer Support, the Trading Standards Institute, Which? and UNLOCK—and will give the Bill its Third Reading.