Posted: 24th November 2014

The recent Ombudsman News (issue number 121) from the Financial Ombudsman Service (FOS) highlights under-insurance and the risks this presents to the delivery of fair customer outcomes.

As the Ombudsman points out, under-insurance issues arise not only through customers giving wrong answers, but also through insurers asking the wrong questions.  Whichever the case, the consequences for both firms and customers can be material.

Firms might, and often do, argue that customers regularly offer the wrong information. It is nevertheless the insurers’ responsibility to ask customers the right information to accurately elicit the information required. The cases in this recent Ombudsman News highlight that in a number of cases, insurers failed to engage with customers appropriately; either because questions were not straightforward and therefore not effective in obtaining the desired response, or tools used to support customers’ valuations were not fit for purpose. This has resulted in the FOS receiving a large number of complaints whereby claims are being rejected or, in the worst case scenario, clients’ insurance policies are being cancelled at a time when they need them the most.

What can firms do to ensure they are best in class?

The test here is twofold.  Firstly ensuring communications with customers are clear, and secondly, providing sufficient warning to customers about the consequences of under-insurance – so as to demonstrate that if the customer had been so warned, they wouldn’t have acted differently.

Looking first at clear communications, it is crucial for firms to ensure that customer interactions are clear and are sufficiently eliciting the desired result. The FOS’s publication provided a timely reminder of the importance of clear and plain English in communications with customers.  For example, in assessing and quantifying the amount of insurance required, the FOS found that firms often ask “how much cover do you need?” when actually, what the insurer really wants to know is “what’s the total value of all the items in your house?”

Clarity of communication extends to any tools used by insurers to facilitate quantifying sums to be insured. Common tools include online valuation calculators, which firms should ensure are fit for purpose and suitable for the customer’s particular circumstances. Regardless of the position of an underwriter or intermediary in the distribution chain, regardless of whether advice was given or not, and regardless of whether the sale was completed without human interaction, the responsibilities to deliver a fair outcome remain. The accuracy of a sum insured is one of the most important material facts customers are asked to confirm; it is also one where the consequences can be severe, and yet surprisingly, it is an area that is often underplayed or poorly explained by firms.

Secondly, firms must ensure that they provide sufficient warning to customers about the consequences of under-insurance. Customers must be made aware of, and helped to understand, both the limitations of the policy they are buying, and the consequences should they not provide a sufficiently accurate sum insured. Over the years, insurers have applied a variety of ‘penalties’ in such situations, from reducing claims in proportion to the percentage of under-insurance (applying an ‘average’ clause), to refusing to meet the claim in its entirety, and to voiding the policy ab initio. This is a complex area, with arguments around deliberate intent and fraud influencing insurers to one degree or another depending on their experience.

You are no doubt aware that the importance of customer communication and understanding throughout the insurance distribution chain is an increasing theme in the FCA’s thematic reviews. The FOS newsletter also brings a welcome reminder that under-insurance can be a key factor in the delivery of unfair outcomes to customers and as a result, can feed directly through to increased complaints. Robust outcomes testing of the sales process should highlight areas for improvement with effective root cause analysis in place as a backstop.

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