The Sunday Business Post had an article yesterday describing how “a new type of insurance product could help consumers to cut the premium they pay on other insurance policies”.   As I read the article, I became increasingly concerned about the consequences of the product described.

Irish insurance firm Blue Insurances …. will launch an excess insurance policy in the coming weeks. …. An excess is the part of any insurance claim that you have to pay yourself. For example, on a policy with an excess of €100, the customer will pay the first €100 of the cost of any claim, with their insurer covering the balance ….. Blue Insurance’s new product will allow customers to insure the excess applied on a range of products, such as home insurance, motor insurance, pet insurance and travel insurance policies. Customers can insure to a total of €750 in excesses …. Typically with insurance policies, having a higher excess can help to reduce your overall premium.

Why is this a bad idea?  Because the normal policy excess exists for very good reasons:-

  • by requiring that the insured person has a material financial interest in protecting against loss, the size and incidence of claims is lowered, and everybody gains through lower insurance premiums
  • it eliminates small claims which are disproportionately expensive to administer – again, everybody benefits from lower premiums as a result

So the effect of this new product being made available will be a much higher level of claims generally.  And it’s clear that the people who will be attracted to this new offering will be those who (for a variety of reasons) are most likely to be making claims.  The result will be higher premiums and a net loss for everybody (except those who have the excess cover and actually make a claim).  This is a classic “Tragedy of the Commons” in the making.

I am at a loss to understand the business model being adopted by Blue Insurances here.  I can’t see how they will avoid massive losses on this product, as the people who are most incentivised to take up this policy are the worst risks from an insurance perspective, not to mention prospective scammers and fraudsters.  I predict that the product will be withdrawn or modified before long, but probably not before it has caused unnecessary cost and inconvenience for nearly everybody.

I hope the major insurance companies will react by declining cover to anybody who insures all of any policy excess; it’s essential that insured persons have some financial interest in avoiding claims.

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Insuring Flood-prone Houses

11 December, 2009

One consequence of the recent floods is that Irish insurance companies will inevitably charge a higher premium to households which are located in low-lying or flood-prone locations.   They may even refuse insurance to such households.   Typically, in Britain, insurers require clients living in Flood Risk Areas to flood-proof their homes or face much higher premiums and excesses.  

According to today’s Irish Times, there is a  “flood blacklist” in Ireland, and “It’s the list you don’t want to be on. Insurers use geocoding to compile a list of areas liable to flooding, and then frequently blacklist homeowners living in those areas. Given the latest round of floods, this list is bound to get bigger…. While many insurance firms will exclude giving flood cover to homes in particular areas, others say they examine it on a case-by-case basis.”

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