Will scorecards make insurance clearer?

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GENERAL insurance providers will be rated according to a new "scorecard" system, the Financial Conduct Authority (FCA) have announced.

The results will be published on the regulator's website, and will enable us to compare both companies and their products.

The system - which is being trialled for approximately 12 months - is aimed at boosting competition in the sector, which includes everything from home to pet insurance.

What's included

The FCA say that the scorecards will show three different pieces of information: how much we are likely to claim on a product, how likely those claims are to be accepted and the average claims pay-out.

But they rejected the idea of including the percentage of claims settled in full by each company, as well as the time taken to settle claims, and said that it would be too subjective to include customer satisfaction rates.

The "scorecard" was one of three options considered - the other two involving a "claims ratio".

Claims ratio data would allow us to see how much policyholders receive as a payout relative to the amount they've paid in premiums.

So, for example, a ratio of 60% would mean that for every £1 collected in premiums, 60p had been used to pay claims to policyholders.

Basically, low claims ratios would represent bad value, while high ratios represent good value.

There were two claims ratio measures proposed: one using it as a stand-alone value measure, and one setting it alongside a company's claims acceptance rates.

The FCA say that consultation on the different options revealed strong opposition to the claims ratio measure from firms, though consumer groups tended to favour it.

Ultimately, the FCA lumped for the scorecard system, as it offered a "wider breadth of information about general insurance products".

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Although the FCA say the scorecards aren't designed with buyers in mind, anyone looking to purchase insurance would be wise to take advantage of the data.

After all, it'll tell us if a particular company are likely to pay out if the thing we insure against happens - and how much they're likely to pay out.

This will be the first time this type of information has been made available to the public.

In another first, the Association of British Insurers recently published figures suggesting that the great majority of claims result in a payout.

What they don't tell us however, is which companies don't pay out.

As it stands, most of us only learn how good a particular insurance product is by making a claim, which is a thankfully rare occurrence.

The method most people favour instead is to use the company's reputation as a jumping off point, before then comparing prices from firms with a similar reputation, and opting for the cheapest premium from the most reputable company.

Even so, the FCA have previously reported on the difficulty of comparing by cost because of opaque pricing structures.

Why now?

They're also concerned that we're getting a bad deal from insurers because of the add-ons they choose to offer us.

Someone buying a car insurance policy, for example, may be given the option to purchase add-ons such as legal expenses insurance and personal accident cover.

Although companies won't be allowed to pre-tick the boxes for policy add-ons from April this year, they're frequently offered towards the end of the sale, often catching us off guard and adding an element of pressure to the transaction.

The FCA think this kind of selling hinders competition. An investigation they carried out in 2013/2014 found that while 78% of people buying stand-alone insurance products shopped around for the best deal, just 42% did so with add-on products.

Indeed, some 25% of add-on buyers weren't even aware that they could buy the product separately elsewhere.

This lack of awareness has given insurers free reign to make their products unfairly expensive, said the FCA.

They concluded that people were being overcharged by up to £200 million each year for "poor-value insurance products that they may not need or use".

The scorecard system aims to make the industry more transparent and "boost competition between firms", says Christopher Woolard, director of strategy and competition at the FCA.

During the trial period - which begins this summer - only a limited number of products will get a scorecard - but if successful, we can expect to see them on more in the future.

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