17
Examination of witness
Matt Scott.
Q1 The Chair: Welcome to today’s meeting, which is the first oral session as part of the committee’s inquiry into the regulation of the consumer insurance market. I thank you, Mr Scott, for attending. This session is open to the public, broadcast live and is subsequently accessible via the parliamentary website. A verbatim transcript will be taken of the evidence and will be put on the parliamentary website. Mr Scott, would you like just to introduce yourself and your background?
Matt Scott: I am the co-founder of Insurance DataLab, a market intelligence firm for the insurance industry. My background originally was in the pensions world and doing actuarial work at Aon. I retrained as an insurance journalist and then set up this business around five, six years ago, essentially to help provide comparable digestible data to inform insurance companies.
The Chair: Could we start with a general question: how do consumers understand the insurance products they purchase, and how are they able to find appropriate products to buy?
Matt Scott: In mainstream markets such as home and travel insurance, which represent over £8 billion in premiums, finding products is very easy. Consumers can buy directly from insurers, through brokers, or via price comparison websites. Understanding those products maybe requires more work. Some consumers find at the point of claim that their policy is not what they thought they bought. They may not understand some definitions, exclusions, or what is and is not covered. While the industry has done a fair bit of work to make that quoting process quicker and easier, sometimes it may be sped up too much and lacking explanation. As it is quite a technical contract they are entering into, there may be argument for slowing the process down to improve consumer understanding so they know exactly what they are buying and understand what is and is not covered by the policy before making a claim.
The Chair: Is it realistic to expect consumers to understand the intricacies of an insurance product?
Matt Scott: If it is explained the right way. The issue at the moment is that key details are hidden away in the terms and conditions where people are not going to see them. For example, on a buildings insurance policy where claims acceptance rates are really low, a lot of that is because people do not understand that things such as storm damage are often excluded. For example, they may expect to be covered if there is a storm and their fence gets blown down; explaining that up front could help them understand. It is more the what is and is not covered rather than the intricacies of the legal detail really.
Q2 Lord Smith of Kelvin: What are the challenges for consumers in comparing options for insurance, and do price comparison websites help, or not?
Matt Scott: They definitely have helped. People use them instead of having to visit all the different providers and it has made it a lot easier to compare policy prices. The issue is: maybe there is too much focus on price. Insurance is a grudge purchase, really, that no one wants to buy. By making it easy to compare on price, that maybe drives a bit of a race to the bottom in terms of the premium being paid. You have things such as the Defaqto ratings, where you can see the breadth of the coverage to a certain degree with a five-star rating. But there is nothing that shows how the policy performs when it comes to actually being used: how claims are accepted, how good the insurer is at that part of the promise. That is maybe where it has become a price-driven purchase, whereas really you need to look more at the value of what is covered. In recent years, things such as the General Insurance Pricing Practices has kind of fuelled that with the introduction of value products. The issue is people are more focused on the price—especially with premiums having gone up in the past—than the outcomes that are being delivered; because although they are cheaper policies, they have less coverage.
Lord Lilley: Is there any information available to people considering buying insurance of the different degrees to which insurance companies make it easy or difficult to claim, resist claims, or try to bore the claimant off? I should declare an interest: my wife, on my behalf, is just about to make a claim to an insurance company, so we do not know whether we are going to be treated like that or not.
Matt Scott: The data is there, but it is not easy for a consumer to find. For example, at Insurance DataLab, we analyse claims acceptance rates; we look at how many are accepted by insurer across different business lines—as well as other metrics—but it is not something that is publicly made available. It is something that maybe should be made available by the aggregators. For example, you see it in other markets, such as life insurance, where they say things such as “99% of claims accepted”. You do not tend to see that on the more general insurance side of things. If you are comparing policies and you see one insurer accepts 90% and another 50%, then that is a big difference and something that probably should be made available to the public and would definitely help.
Q3 Lord Griffiths of Fforestfach: Can you tell us how the insurance industry has responded to the criticisms that it has had from the public?
Matt Scott: There has been a big focus on things such as claims handling. With the Which? super-complaint highlighting things such as fair value assessments and consumer duty, it has come more under the spotlight. It is fair to say that the industry has a problem with public perception—to a degree unfairly and to a degree warranted. Sometimes it is assumed that insurers maybe do not want to pay claims, or they try to refuse them. But, in the grand scheme of things, they want to pay valid claims and they want to pay them quickly because it is good for their business; it costs them less, essentially, if they are doing it in a quick way. However, that issue persists. They are monitoring it more; so with the reporting that has come in under the consumer duty and that kind of thing, there is definitely more of a spotlight on that.
I do not think that it has necessarily translated into an improvement in outcomes yet. We are seeing some metrics improve, but others maybe have actually worsened. I have some stats here. In terms of the claims acceptance rates I spoke about earlier, since fair value came in in 2021, the acceptance rate for travel insurance has gone up between 2% and 5%, so it has improved slightly.
Lord Griffiths of Fforestfach: Sorry, by how much?
Matt Scott: By 2% to 5%. Whereas in home insurance those acceptance rates have gone down by 5% to 6%, depending on what type of policy it is. Then since the consumer duty came in in 2023, contents has improved by 11%; travel insurance is flat to 6% improved as well; whereas things such as buildings insurance is down 9% and combined contents and buildings is down 6%. Those metrics show that travel has improved, the others have deteriorated a bit over that time—maybe with the exception of contents—but we are seeing a large variation. We are seeing that range in home insurance from 45% to 100%, so there is a lot of variation on that; some companies have improved, others have declined a bit. Then, if you look at the complaints trends, largely flat. There has not been a massive improvement, maybe some have come slightly down. There is minimal impact yet; whether things will change going forward is hard to say because there has been that focus on it.
The other thing to look at is how the operational impact has driven up costs quite a bit for a lot of insurance companies, particularly brokers. I have heard some instances where brokers have had to sell their business because the cost of regulation has become too high. For example, on fair value assessments, you could see brokers doing thousands of assessments across the different insurers and products they sell. That has led to some reducing the number of insurers they work with as well, so there has been a negative there in terms of choice through some channels, which is bad for the consumer as well. There is minimal positive impact on outcomes at the moment. It could still come but has not quite come through yet.
Q4 Lord Griffiths of Fforestfach: You very kindly provided a briefing, and you started by quoting Peter Drucker where you raised the issue of the importance of culture. I was on a company in America for 15 years and Drucker was very closely involved with us. I believe culture is absolutely critical. The question I was left with as I finished reading your briefing was: to what extent are we dealing here with culture or regulation, and to what extent through regulation are we trying to change culture, and if we were trying to change culture, are there different ways of doing it? For example, we built a very strong relationship with Harvard Business School, and it did about 10 case studies on us in the end, and members of staff wrote books on the subject. It seems to me that you have opened the gates very wide in your briefing.
Matt Scott: We are seeing different responses in different companies, to be honest. I have never worked in an insurance company so I maybe cannot comment too much, but from conversations I have had, you see some insurers that engage very deeply with the ombudsman, for example—the Financial Ombudsman Service—to really understand what those complaints are about; what the root cause was and why the ombudsman came to the decision it did, particularly when they have been upheld in favour of the customer. You see a lot of companies that have really drilled down into their policy wordings and how they are read by people, and how the claims journey is managed as well, whereas others maybe have seen it as a tick box exercise. It is very much dependent on what the culture in that organisation was beforehand and how focused it was on the customer before the regulations came into force.
In terms of changing culture, in my personal opinion, trying to change culture by introducing rules is probably not going to succeed. If your culture is against what the regulations are trying to achieve, then you will maybe push back against them and see that more as a tick-box exercise, whereas if you are more open to that, you are going to embrace it and really see the benefits of it. There are real benefits to be had from embracing these regulations and really focusing on the customer and what outcomes they are getting. It delivers a better service to your customers, which means they are going to be more loyal to you, and we have seen that it helps improve financial results as well. If you are offering good customer service then it translates into better underwriting and better profits, so there is kind of a win-win for those companies that embrace it.
Q5 Lord Hill of Oareford: Let us stick with the thought underlying Lord Griffith’s question for a minute. Can you try to unpack for us the contribution that you think regulation has made, either to things getting better or to things getting worse?
You used an example of insurance brokers. I forget precisely the point that you made, but you basically said a well-intentioned piece of regulation was maybe having the effect of driving insurance brokers out of the market, and therefore reducing the choice to a consumer who is becoming more and more dependent on comparison sites where price is the main determinant. That then leads to massive churn, which is a pretty horrible model for everybody, it seems to me, where no one is satisfied. The company providing the insurance has to build in the fact that the only thing people care about is price, and therefore “Let us outsource everything”. You end up with something such as airlines charging for everything and everyone is pissed off because the overall experience is worse. How do you see the role of regulation improving things over time? From a regulatory point of view, what do you think has worked, and what do you think we should maybe look at again because it has ended up not working in the way that one might have hoped?
Matt Scott: Obviously the intention was to make things better, and clearly that is the case. Some unintended consequences have been the increased cost for the broker community primarily. For example, brokers have to get all the data from the insurers, which is hard to get: they may be unwilling to provide it and it is all provided in different formats, measuring metrics in different ways. This means when you are working with, say, 20 insurers you have to go to each insurer for each of the products you sell. That is a lot of work, whereas maybe if it was put more on the insurer—that is in most cases developing that product and then selling it through the broker—that may be easier for them to achieve, as they largely have all that data internally already. That is one issue.
Another is, when the rules were introduced, it was deliberately left so that there was interpretation as to how you adopted it, how you reported on it, and how you measured the different outcomes. I believe there should have been maybe a more prescribed process around that, or more of a framework. That is something that we are doing at Insurance DataLab. We are ingesting all this different data and creating a framework where brokers can, for example, go and assess their insurer partners much easier by having that data all in one place. We look at claims’ outcomes, the complaints process and solvency and underwriting, and we have made that more comparable across the businesses. Without that prescription, that comparison is missing.
The issue then has been that if you cannot compare properly across the different companies, it is hard to know who is performing best and worst. When you do not know who is performing best and worst, it is hard for those poorer performers to see they need to improve and for it to drive up standards. That issue is something that could be addressed by having a framework in place so people can essentially compare apples with apples and know where they need to improve. Then, if you see that affecting things such as business placement through brokers, that is when maybe those insurers that have not embraced it as well might start to sit up and take a bit more notice.
Lord Hill of Oareford: How much of the advice market is still being done by brokers, roughly, as opposed to everyone just going online and then ringing up and trying to get their premium?
Matt Scott: Brokers are on the price comparison websites a lot of the time as well. The majority is through the aggregators for home and travel, but I would not know the amounts.
Q6 Lord Hill of Oareford: To your earlier point, which you have just touched on in your previous answer, about there not being readily available comparable data on performance in terms of dealing with claims, the percentage that are paid out and so on: what is preventing that information from being readily available? You would have perhaps thought from a market point of view, if you are an insurance company, in a normal market you are competing on price and you are competing on service. What I think you are saying has been happening is that the competition feels as though it is only really on price. What is preventing them from saying X% of all our claims are dealt with within such a time and paid out? Some of them do it.
Matt Scott: Consumers are definitely more focused on price. Brokers are more aware of the service element. There is data available; the regulator publishes things such as claims acceptance rates, you can get FCA complaints data and then you can get data from the ombudsman, albeit not as much detail publicly. The issue is it is all in different places, it is all on different measures and it takes a lot of time to go out and source it, compare it and draw your conclusions. A consumer is likely not going to do that. They are just going to go in, see the price and pick, maybe not the cheapest, but the cheapest from a brand that they have heard of, and if there is a well-known insurance company on there in third place, they are probably going to go with that one. They may look at the Defaqto rating and see what level of cover it is, but they are not going to go to the regulator’s website for a few different measures and then go to the ombudsman website and look at that.
Also, some data is not available. So, the amount of time to settle a claim is not readily available; it is not something required to be reported on publicly. An insurer could decide to put that out there, but I have not heard of any that do. Then, again, for brokers, they work for so many insurers, going and finding that data and doing the comparison takes time, and doing the regulation does not actually bring in any money. It can help because if you are delivering a better service to your customer over the long run it will improve your business, but it does not bring it in through the door straightaway and that is the issue. That is one of the reasons we do what we do; we bring that data together all in one place, and then we sell it out to the industry—effectively, we have done the hard work for them.
Q7 Lord Davies of Brixton: Continuing with the role of regulation, I think the insurance market—we are just looking at travel and house—has a fundamental problem because its public face is that it is just a commodity that you go along and buy. But ultimately, when you look at the two ends of the process, inevitably there is some underwriting involved and then at the other end you have the inevitability of loss adjusting or claims handling and, essentially, both those processes are more of an art than a science. Regulating art is an extremely difficult thing to do; you could not have regulations setting out what constitutes a good picture. Do you feel the logic of that—that there is a fundamental problem with regulating the market?
Matt Scott: Maybe there is a bit of art to it. The outcomes are very measurable, so you can see what is being delivered to customers. Focusing on that is the right thing to do, which is what the regulation is doing. If you are going to start prescribing how something was underwritten and how it was priced, then that would create further issues. I know in America that can happen, and it is a bit of a nightmare from what I have heard. It very much needs to focus on the outcomes. There have been issues that you can see in the data. For example, in home insurance, claim acceptance rates range from 63% to 74%. That is quite low; by comparison, motor insurance is 99%. Now, it is true that a car insurance policy and knowing what is or is not included is much easier to understand than a home or buildings policy. But when you see some insurers’ buildings policies claim acceptance rates as low as 45%, maybe there should have been more focus from the regulators on finding out why that was the case and maybe some more enforcement based on those metrics that are being measured. That has not really happened yet.
I know the FCA did a review into outsourced claims handling last year, and it said it fed back to some insurers that were involved in that, but we have not really seen much actual action. For example, I have not heard that any policies have been withdrawn for not delivering value when those fair value assessments came in. Maybe when you are seeing those low acceptance rates, you could question why they are still being sold if over half of claims are denied, particularly on something such as a buildings policy. I would maybe question the enforcement of it. It is looking at the right things, but maybe not being used in the right way.
Another example is that same FCA review saw that only 32% of storm damage claims actually resulted in a settlement; 45% or 46% were denied and 19% of customers walked away, probably because it was either too complicated or they realised that they were not actually covered for what they were trying to claim for. Again, that is an issue; when you see figures such as that, more needs to be done, primarily on the understanding of that policy by the consumer. We know that the most common cause of complaint is a claim being declined, particularly in home and travel. That is not because insurers are denying valid claims; a lot of the time it is because they are not covered and that is an issue with how the policies are sold, where, again, you can be clearer. That data is more scientific, you can go out and assess how your policy wordings are being understood; how clear they are and how transparent they are—that kind of thing.
Lord Davies of Brixton: I get the importance of outcomes. The question, though, is: what is the role of regulations in determining what the outcomes are? We have regulations at the moment; is it more that we do not have the right regulations creating dissatisfaction in some markets, or is it that the regulations are there and they are not being enforced?
Matt Scott: The regulations are looking at the right things. I have been surprised that there has not been action in some markets before that maybe should have happened, and that is due to a lack of enforcement.
Lord Davies of Brixton: That is a pretty strong condemnation of the market you cover.
Matt Scott: It could be coming. In response to the Which? super-complaint, it said that it is looking at the issues raised in its ongoing consumer duty supervision. It has taken in a lot of data and it has not been in that long and there have been other issues the regulators have been looking at—the total loss issue, premium finance, that kind of thing. I am not saying that the regulator is not doing the right job; it just could be that it is coming down the line.
Q8 Lord Turnbull: I am looking at a chart you have sent to us about uphold rates. Now if they are going up, that sounds like a good thing, but it may actually disguise some dysfunctional behaviour. When you talk about an acceptance rate, you apply and they pay out your money; it is an acceptance. If they refuse you and you go to the ombudsman and the ombudsman reprieves you, they are paying both first-time round acceptance rates and then the acceptance that they have to do because they are upheld. When you use acceptance, is it the total of the two, or is it just the first?
Matt Scott: The honest answer is I am not sure. I believe it covers both. If the claim has been accepted finally, then my understanding is it would be covered under that, so 40% for example of both. The upheld rate is when the ombudsman finds in favour of the customer. The upheld rate is not necessarily just about claims; claims are the majority, around 80% in home and travel, but there are other things as well. It is when the ombudsman finds in favour of the customer and against the insurer on the decision it made on whatever the complaint was, not necessarily the claim. For example, it could be that the complaint is upheld, but the claim might not be paid in full, and that makes it a bit more of a grey area. A high upheld rate shows that the ombudsman is saying that the insurers made the wrong decision.
Lord Turnbull: Could the insurers be consciously adopting a strategy? “Let’s be tougher. We’re going to reject more claims, more of them will go to the ombudsman, we’ll lose some there but net we could still be better off by operating this hostile environment”.
Matt Scott: They could do; I do not believe it is widespread. There is a perception that insurers want to deny claims. Speak to people on the street and they generally think that is what insurers are allowed to do—refuse claims. I do not think that is the case. For example, every time a case goes to the ombudsman, it costs them more money. If a claim drags on, it costs them more—just the operational cost of call centres handling that claim and that kind of thing. But there is an issue that claims are being denied. I do not think the majority of the time that it is valid claims; a lot of the time it is that lack of understanding. I know I might sound a bit like a beaten drum, but I believe insurers do want to play valid claims. There will be some that do not and some may have a slightly higher rejection threshold, but I do not think that is a common case.
Lord Turnbull: To take an analogy, in my borough if you are charged with going through an LTN closed street and you complain, they will never accept the complaint. They will just say, “Take it to the tribunal and let the tribunal sort it out”. That could be a valid commercial model—not a nice commercial model—but are you saying you cannot really prove whether insurers have consciously chosen to be a bit tougher on claims than they used to be?
Matt Scott: It is not something that I could say conclusively either way, to be honest. I would say that claims acceptance rates are low in the home and travel markets in particular. They have gone down a bit or up a bit in some markets, but it is not such a marked change that I could say they have got a lot worse in recent years. I do not think it is in response to the financial conditions we are in at the moment or anything like that. I have not seen a step change like that, but there could be some players doing that.
Q9 Lord Turnbull: You point out that one of the problems may be that people have a poor understanding of what exactly they are buying. When they buy it, they may look at these terms and so on, but then you get to the renewal and then you get a letter that says, “We have reviewed our policies and we are making these changes”. You have no idea really whether that is to your advantage or theirs and they can slip through all sorts of things—“We used to pay this, but we are not going to do so anymore”. Not many people would spot it, and the regulator has to be really on the ball to see what is actually happening. Is the treatment at renewal as good as it was when you bought the policy for the first time?
Matt Scott: We see, in the home market particularly, that if you have not had a claim then a lot of the times, if the price seems fair, you will renew. There may be changes to the terms. The claims experience changes things; if you have made a claim and had a good experience, then you are probably more likely to stay, even if your premium goes up a bit because of that claim, whereas if it is a bad experience, obviously you are probably going to look elsewhere. For example, I was speaking to someone the other day who had a flood in their house. They phoned up to make a claim and they were looking through their policy documents and they were seeing that, for escape of water, the excess was £500, rather than the £350 excess they had bought with the policy, which is pretty standard, and they were aware of that and they were fine with that. But what they did not know was that that excess applied to every single room in the house that was affected by the flood. There were four rooms, so that is an excess then of £2,000. It cost him less than that to put it right himself, so he did not make a claim. He has already decided he is not going to that insurer again.
Now, under the terms of the policy, that is what the rules are, but he was not aware of that and there may be an argument whether that is fair or not. He bought it, that is what he bought, and so the insurer would argue he should have been aware of it. But maybe because of that lack of understanding—it obviously was not made clear enough for him; other people may have known—there are issues such as that, where people do not know what they are buying.
Lord Turnbull: I am not sure if it is really within our terms of reference, but I think there is another abuse going on, which is renewal. You buy a policy and then next year they say, “It has gone up by 20%”. I say, “My income has gone up by 4%”, and you haggle with them and they bring it back down. Is that behaviour consistent with treating customers with respect and integrity and so on if, basically, the renewal premium is a try-on and they see who just buys it and who resists it? I find in a lot of cases I keep dodging, after about two or three years I change to someone else and then that pattern repeats itself and I go back possibly to the first one.
Matt Scott: It used to be the case—maybe more in the motor market predominantly, but in the home and travel environment as well—where new customer prices were a lot cheaper than renewals, just as standard, the idea was that you would bring in that new customer and then you would put up the premiums at renewal. It was almost like a loss leader in that first year, and then after that you would get your money back. I cannot remember when it was, but rules were introduced to stop that. You can offer different premiums now for new business and renewals, but you can still get that negotiation at renewal with some providers. Some just flat refuse that—it is just, “That is the price”—but you get some providers where you can phone up and see if you can get a better deal.
Lord Turnbull: Is the regulator enforcing this—that renewals should be treated on the same basis as new customers?
Matt Scott: In those instances, I imagine that the new business would have been sold at the same price, which is what it should be. The other thing would be is if that policy being sold at renewal is no longer available, in which case then it is not available to new customers so the pricing rules would not apply because the same policy is not being sold. It could be there has been changes of terms that have been brought in for new policies, which means that the policy that is being renewed no longer exists for new customers, for example.
Q10 Baroness Bowles of Berkhamsted: We have already discussed that checking what is in and what is out and those kinds of things is important. Has the focus on price and the use of websites for comparison meant that it is all too much of a package? You tick the boxes and you get a price at the end or whatever, rather than there being a bit more interrogation so that the customer can appreciate that some add-ons that look trivial are actually the things that are boosting the price quite a lot. Certainly with the advent of AI there must be much more opportunity to iterate round and the fact that maybe they have hiked up the contents insurance, or everything has got a bit old and faded and you did not need that. How much is that looked at, or has this comparison pricing squeezed out those kinds of presentations?
Matt Scott: It makes an issue because it makes it all about the price. Some things that a consumer might expect to be included as standard are now an add-on, which needs to be bought as an extra part of the policy, in order to get that initial price even cheaper. We see that predominantly with the value products, where it is the minimum level of cover that you can buy really and it is at a much lower price. You have another insurance problem, for example, in the home insurance market where people do not know the rebuild value of their house—how can they be expected to?—so that is not covered. The value of contents is often a lot higher than what people expect, so they are not buying enough cover there, and that is an issue. Again, if your house burned down and you did not have enough cover, the insurer will not pay out the full amount; they will only pay out a percentage based on what was covered by the policy. That is an issue you see in the market that has been driven by the price comparison websites.
They have helped make it a lot easier to buy a policy now, but probably more work needs to be done on the understanding. With the question sets, for example, there has been a lot of work done to reduce the number and in some cases that is great. For example, you can get the data from a previous login where you have shared details of your house. Or in motor insurance there are certain datasets that they can plug in to get data around your driving history. That is great for reducing the question set but when it comes to levels of cover, maybe that has been pared back a bit too much, and more time needs to be taken. That makes it a longer journey for the consumer, but one that delivers more value and would ultimately deliver more outcomes. I would say the issue with that is that most people do not make a claim on their policy every year, so you are making the experience worse for the majority, but to deliver the value to those customers who actually use the products. I suppose that is the line that has to be walked and the balancing point there is finding the right level.
Baroness Bowles of Berkhamsted: Let us switch over to travel insurance as a change. Is that adequately subdivided? Of course, if you are going on holiday abroad, your travel company is going to want to see that you have travel insurance so everybody starts looking at that quite early on. But a big part of the cost is actually cancellation insurance. Is the consumer aware that, especially if they have medical conditions and things, the cost if you take the insurance out close to your departure date may well be a whole lot cheaper than if you take it out when you first thought about booking? I do not recall that ever being flagged up anywhere.
Matt Scott: For people with pre-existing medical conditions, a lot of the standard products understandably are not right for them, so they are more likely to go through a broker who understands the process a bit more and can help them with that—there are very specialist providers that cover that. There may still be an issue with consumer understanding, though. For example, I have heard of cases where someone has had a pre-existing cancer diagnosis, they are in remission, they have been given the all clear and they are covered to travel for anything related to that if there was a recurrence or a related illness. Then, between taking up the insurance and going on holiday, they are called to the doctor for a test, so they phone up their broker to tell them, and the broker says, “Okay, we have to take that condition off cover now and then if you go on holiday, you will not be able to make a claim because of that”. But if you were to cancel because of it, you would be covered. There are issues there, because people do not understand how the policy works in terms of that.
Cancellation cover is important. You could fall ill or be injured in the UK before you go abroad. If it is a longer period of time prior to the holiday, there is probably a more likely occurrence that could happen, so it is an important part of it. I can maybe understand why it is a bit more expensive; some large costs with overseas claims around overseas medical costs or repatriation can be huge, albeit rare, so that is baked into the price as well. But again, people need to understand how these policies work, and it is probably fair to say they do not always understand it, particularly in those fringe cases, which maybe makes broker advice more important, for example.
Baroness Bowles of Berkhamsted: I remember doing some calculations once and worked out that the quote for the insurance was higher than the cost of hiring an air ambulance to get home, so I did not take it out. I just think that it is not flagged at all and some people are not necessarily recognising, taking out the medical conditions thing, just how much the cancellation cost is versus the travel cover cost. There should be a bit more clarity around that, as people are probably paying more than they need in some instances because they could delay their booking or something.
Matt Scott: I can understand the argument for making clear what those different elements are. Yes, I can definitely understand that.
Q11 Lord Eatwell: I declare an interest as a non-executive director of Unity Trust Bank. Let us take it from the view of the insurance company for a moment: I want to price the policy, so I look at the probability of claims, which I get from historical data, I take out a section that would be fraud, also from historical data, I put in my refusal rate, and then I can price the policy. The refusal rate is part of the business model. Would you agree?
Matt Scott: I will be honest and say I do not know the intricacies of pricing a policy. I was not aware that a refusal rate was built into that. I would have thought if the claim was valid then that would have been assumed to have been paid. I would not like to comment if something such as that is taking place; I would not know.
Lord Eatwell: Okay, thank you. The other thing I have been puzzling about is motor insurance. Everybody says, “Oh, it is 99% acceptance” and so on and so forth. The peculiarity of motor insurance is that many of the terms are enforced by law: you are required by law to have these particular terms. Therefore, you have a particularly strict form of regulation, which is associated with a 99% acceptance rate. Perhaps the problem with insurance generally, in terms of household, travel and so on, is that it is underregulated compared to motor insurance, which is very tightly regulated in several of its characteristics—not all of course, but several of its characteristics. Is that a credible story, do you think?
Matt Scott: I would probably say it is more to do with the complexities of the risk. If you compare buildings insurance, generally, one of the conditions of a policy is that you have to maintain, for example, the state of your roof. If your roof is blown off and it was maintained, then it is covered; if it was not maintained, then it is not. That is a pretty standard term. I would not say you have a similar type of instance in car insurance.
Lord Eatwell: That is interesting. What does maintaining your roof mean? Does it mean having it inspected every year? I certainly do not have mine inspected every year.
Matt Scott: Well, that is the grey area, I suppose, and that is where the issue lies in that market. There are instances where someone will think they are covered and the insurer would say they are not because maybe their roof was in a poor state of repair and there may have been an issue there already—how they get to that, I do not know, I will be honest—whereas with the car, if you have crashed your car, it is pretty obvious you have crashed your car. It is a bit less clear. Then you also have things where there are exclusions. Storm damage, as I was saying earlier, that 32%, is a big one. People think it is covered and it is not. If you were to make a claim, the insurer could deny it because, for a valid reason, you are not covered under your policy; that is reported as a denied claim. In car insurance, leaving your keys in the ignition and someone stealing it would be one example where you are probably not covered. But there are fewer instances where you are not covered—I actually cannot think of other examples—whereas they are much more apparent in home and contents.
With contents insurance, accidental damage is often an additional buy-on that people may think they have when they do not. Laptops are often excluded if they are over a certain amount of value. High-value products can often be excluded under a typical policy. There are many more caveats and exclusions. Also, the FCA picked up: what defines a storm? That can be something as well that comes into a policy for storm damage. There are many areas for discussion about what is and is not covered under those policies, and I do not think it is a case of more regulation would sort that, unless you get into the minutiae of legislating what the definitions are, which would be too restrictive. It is more a difference in the type of risk being covered rather than the level of regulation.
Q12 Lord Hollick: You have said on a number of occasions that the customer needs to understand and to be able to have enough information to make an informed decision. You have made the point that taking an insurance policy out is largely driven by cost. Is there a requirement to provide a minimum of information about what is covered and what is not covered? It would appear from your comments that it is only when somebody makes a claim that the full cover, or lack of cover, becomes apparent.
Matt Scott: Insurers do have to say what is and is not covered, but it is often hidden in policy documents that people do not read.
Lord Hollick: But should the regulations be clearer about that? Should it be on the front page that this is covered and this is not covered? You have talked about storm damage for instance, and you have talked about the sort of the condition of the building. Surely that should be prominent in the websites.
Matt Scott: Yes, and that is the issue with the work that has gone into speeding up the process. There should be certain instances within the quote journey where those exclusions are made clear rather than, “Read these key fact documents or terms and conditions where it is disclosed what is and is not covered”. I would argue that it would be much better for everyone if there was, “This is covered; this is not covered”, just very clear before you go and buy, on the web page, instead of in the documents themselves.
Lord Hollick: The story you told about the amount the insured has to pay towards any claim is per room is a revealing comment. Some people would say that is rather a slippery way of selling a product.
Matt Scott: I would probably not say that is a commonplace term; it is something I have heard of. That is why there is the perception issue with people saying the industry is trying to deny claims. In something such as that, there was no point in that person making a claim because the cost of repair was less than the excess.
Lord Hollick: We need more information on the front page and that information should include claim acceptance rates, but also the speed of acceptance. It seems to me one of the challenges that the insured have is: something has happened, they need money quite quickly to pay for it and therefore the pressure is on to settle, whereas the speed of settlement can be very prolonged. Is it not the case that most insurance companies now in fact outsource claims? So you get into a long journey with people trailing to different parts of the world to call centres to find out what is going on or what is not going on. The information about what the claim acceptance rate is and the time to settle is again critical information.
Matt Scott: I would agree with that wholeheartedly; that should be something that consumers should be aware of. Those delays are a real issue, particularly in buildings insurance. Across home and travel, 18% of ombudsman complaints are about delays to a claim, and that is not just claims complaints; that is all complaints. In buildings insurance, those delays are 23%; it is more than double contents or travel insurance. That is a big issue.
Lord Hollick: Lord Eatwell made the point that the law actually deals with a lot of what has to be covered for motor insurance. It would seem to me a similar arrangement exists with a lot of houses because the provider of mortgage finance has a keen interest to know what is covered and what is not. Do mortgage providers require to see the insurance cover and what is covered and what is not? That presumably goes to the heart of whether the value of their mortgage is whole or not.
Matt Scott: I believe there is a requirement to have buildings insurance to cover the cost of rebuilding the property if it was burnt down, for example. But I have never heard of that being required to be shown to the mortgage provider, no. I would imagine that, in a lot of cases, properties are underinsured because people often underestimate what it would cost to rebuild the property, particularly with the price of labour and materials having gone up so much lately. That probably is a big issue. I could be wrong, but I think there is legislation around minimum levels of liability cover, for example, under some home insurance policies, but I would not know for sure. I do not think there is around rebuild and that kind of thing.
Q13 Lord Davies of Brixton: Can I just follow up on that point? The questions have compared motor with housing. For example, a big factor in the motor insurance is the no claims discount, but I do not think you get that in housing. What impact does that have on claims rates? I know I have more than once had a valid claim, but I do not pursue it because I do not want to lose my no claim discount.
Matt Scott: Technically, if you have an accident, even if you do not claim, you should tell the insurer.
Lord Davies of Brixton: Yes, quite.
Matt Scott: In home insurance, the impact of historic claims is less than in motor. If you are having frequent car accidents, it probably means that you are more likely to have one in the future. In my understanding, it is less marked in home insurance, which is why there is not a no claims discount. I could be wrong on that, but I think that is why it was introduced in motor insurance rather than other markets.
Q14 Lord Sharkey: The consumer duty does not appear to be driving any notable improvements. Do you agree with that? If you do, could you say what we need to do about it?
Matt Scott: That is a tricky question. I would say there has been minimal improvements as a result of it. I spoke about the claims acceptance rates earlier—improved slightly in some markets but got worse in others—so I would question what impact it has had. It has helped the industry focus on it more. The insurers that are embracing the culture behind it and embedding it in the organisation have improved. You see some improvements in those markets in terms of the claims acceptance rates.
On the other hand, you see rates going down for some providers across all markets. For example, if you look at those claims acceptance rates, there is a big variation in the market. In home insurance, you see buildings claims acceptance rates between 45% and 85% across different providers. In contents insurance, it is 60% to 90%. For combined policies, it is 55% to 100% and then in travel insurance, again, 55% to 100%. You are seeing insurers have very high upheld rates that are in line with other lines, such as motor insurance. The issue is at the other end of the market where you have those providers who are denying such a large level of claims. My gut feel would be they are the providers that maybe have not engaged with the regulations as much. They have maybe seen it as more of a tick-box exercise where they are reporting on it but are not necessarily looking into the issues. That would probably be my guess.
In terms of what to do about it, we will see more action coming down the line from the regulator. I know in response to the Which? super-complaint, it said it was dealing with those issues as part of its ongoing oversight, and we will see something on that at some point; I would be very surprised if we did not. The issue is there needs to be enforcement action for changes to be made. That is when you will start to see those changes from those poor performers. A lot of people have improved, but there are some dragging down the market.
Lord Sharkey: I was very puzzled by the fact that travel insurance claims have an 80% acceptance rate.
Matt Scott: Between 80% and 86%, depending on the type of policy—
Lord Sharkey: That is much higher than buildings and contents. Why is that?
Matt Scott: A lot of it is down to buildings claims. I know I am saying it again, but the issue there is around the understanding. People just do not know what is and is not covered. It is on the industry to make that clearer and improve that. Lots of things that maybe a consumer would expect to be covered as standard under their policy are not.
Q15 Lord Hill of Oareford: Could you just say something briefly on what you think the role that outsourcing of claims management has had? You would guess—I do not know; perhaps you do—that the kind of contractual relationship that the insurer might have with the claims manager would probably have performance targets around volume of payouts, speed, what have you. How does that all work?
Matt Scott: It is often a very convoluted chain, so you have lots of different people involved. That makes the management hard. The FCA review last year said there were issues with oversight and a lack of information coming from those third-party providers to the insurer, and maybe there should be a closer eye being kept on how they are performing. A lot of the issue comes down to communication. With buildings insurance, for example, if you are having a repair to a house, it can be quite a long process. Delays are inevitably going to happen if jobs overrun or further issues are discovered. A lot of the issues come from a lack of communication from the insurer, and that probably stems from there being so many people in the chain.
There are benefits to outsourcing it to professionals; they have the economies of scale, they have the experts in place, instead of an insurer—particularly the smaller ones—keeping them on hand themselves. The issue is around the oversight and the complexity of those supply chains. It has probably come more to the fore in recent years, with the issues we have seen around labour shortages and the increased cost of parts, which can make claims more complex and harder to manage. The FCA said there should have been better oversight in some circumstances in those markets.
Lord Hill of Oareford: Have you, or has anyone else, ever seen what the contractual arrangements are and what incentives are placed on the claims managers in those contractual arrangements?
Matt Scott: I would not know on that, I am afraid.
Q16 Lord Griffiths of Fforestfach: It is now three years since the consumer duty was introduced. Some chief executives might have said, “We’re going to do a thorough review of our business and see if we can’t improve it in line with the demands of the consumer duty”. Others may have said, “Unless it is going to be regulation, frankly, this is just more noise from the regulators”. I just wonder: do you have any evidence at all of the scale of different responses?
Matt Scott: How do you mean? Sorry, I am not sure if I follow.
Lord Griffiths of Fforestfach: To what extent have you found companies saying, “Yes, we’re going to take the consumer duty seriously in the way we do our business, the way we treat customers, the way we produce information and so on—we’re doing a thorough 360-degree review of what we’re doing”. Other companies may say, “This is just more sort of garbage from the regulators and, frankly, we can pass”. Do you have any evidence of the response?
Matt Scott: Not really, no. Anecdotally, the majority of the insurers I have spoken to say they are embracing the regulations and have put things in place to help with the monitoring and reporting. There will be players that see it more as a headache rather than a benefit, but I think the majority are embracing it. From what we have seen, there may be certain players that are pulling down the market, the averages and the positions in different markets. The majority have embraced it and we have seen some improvements; I just think it is the poor performers that are maybe disproportionately affecting outcomes a bit.
The Chair: Before I draw this session to a close, I omitted to declare my interest at the beginning. Having exhorted my colleagues to do so earlier, I then forgot my own. I have shares in listed financial services companies, including insurers, as recorded in the register of interests. With that, Mr Scott, I would like to thank you very much for this evidence session. It was full of fascinating insights, and I thank you very much for taking the time to come and talk to us today. Thank you.
