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 have – and are only used once every 664 years?

Unfortunately, this is just one of the dark corners of the insurance world, and one that weaponizes our lack of it understanding to us.

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

Let’s start by delving into the above example.

You can broadly categorize consumer insurance into two groups: high-profile and low-profile. The high-profile group includes things that the average person is very familiar with, such as home, car, travel, and pet insurance.

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

But many stealthy policies are almost never claimed, according to figures from the FCA.

Taking one product as an example, only 0.16 percent of personal accident coverage policies sold as a supplement to auto insurance are claimed each year. This means that someone with this insurance claims a claim once every 664 years on average.

And there are millions and millions of stealthy deals out there. Around 3.5 million Britons have personal accident cover, to start with, paying £30.8 million a year in premiums.

Policies ARE worth it…when you make a claim

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

Get personal accident coverage. Yes, only 0.16 percent of policies are claimed per year. But when it does, the product pays out 96.57 percent of the time.

But in practice, many of these deals are completely useless because the buyer doesn’t know what they bought, forgot about it, or just didn’t take advantage of it.

Do we really understand what we are buying?

This example speaks to a broader problem with insurance, which is that much of it is difficult to understand.

We buy things because we want them to do their job, and insurance’s job is to pay claims. But one quirk of insurance is that insurers can turn down that job — paying claims — on the grounds that consumers didn’t understand the nuts and bolts of what their insurance policy covered when they bought it.

That is quite unique. When I buy a toaster, that toaster’s role is to make my breakfast. I don’t need to understand the electrical circuitry inside, nor does the toaster manufacturer expect me to.

In other words, that toaster was designed around my ignorance, but the insurance wasn’t.

And when I buy a toaster, I know I bought it. FCA figures suggest the same cannot be said for some insurance deals.

This is a problem because insurance requires understanding in a way that other products don’t, while at the same time being much more complicated.

For example, home insurance, at its most comprehensive, has clocked in at 20,000 pages long — that’s pages, not words. How can we be expected to fully understand something for even half as long? And then maintain that perfect understanding until the time we need to file a claim? What happens if we then choose to purchase a separate supplementary insurance policy?

Then keep in mind that you can buy all that online in less than five minutes, as millions of us do every year. We never held out hope of understanding some of these things, or even remembering buying it in the first place.

What does it take to change this catch-22?

This combination of complication on the part of insurers and customer apathy creates a system full of blind spots. One such blind spot is the one described above: that consumers can buy a deal and never seem to know about it.

That catch-22 situation will continue to stumble consumers until we can figure out a way to fix it.

Enter the regulator, who has been rebuking insurers on this issue for nearly a decade.

The FCA tried to address the questionable value of some add-ons way back in 2014 – in fact, it was the first major work the FCA did.

At the time, the FCA found that “selling a product as an add-on often led consumers to purchase products that were of poor value and not what they needed.” It also turned out that ‘the value of non-life insurance policies is not always clear’.

In 2016, it introduced rules that say customers must actively choose to buy an add-on product. Then came more FCA rules in October 2022 to address that supplemental insurance is too expensive for the value it brings.

And more rules are coming.

Starting this summer, FCA-regulated insurers will have to adhere to a new set of rules called Consumer Duty. This means that insurers can be hammered by the FCA for selling policies that consumers don’t understand or that don’t meet their needs. Insurers and brokers will need to ensure that customers make well-informed decisions about what they buy.

This Is Money understands that the FCA could also look into cheap insurance deals in the future.

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

What has to happen

Basically, through all this regulation, insurers are supposed to make sure customers know what they’re buying and are actively choosing to buy it.

That’s a nice idea. But understanding many insurance deals, really understanding them, is almost impossible.

And in practice, that “active choice” boils down to ticking a box on a website or reading a bunch of nonsense about insurance that consumers will almost certainly not engage with.

The problem is clear. What is more difficult is coming up with a solution to a problem that has been going on for years.

In my opinion, insurance and the process of buying it should be clearer, or consumers will have to live with the consequences if they don’t understand it. The latter is unthinkable, so the former remains.

Perhaps insurance deals should be designed more simply, as some insurers are already doing, to their credit. Insurance design is more like toasters, you might say.

Or maybe we should bite the bullet and accept that we need to spend longer buying insurance to make sure we have the best grip on it.

That would somehow require us to untie our cultural tendency to treat insurance as an annoying purchase out of spite—no small task.

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