Consideration of Bill, not amended in the Public Bill Committee
New Clause 1
Review of the impact of the Act on availability and cost of consumer insurance
‘The Treasury shall, within one year of commencement of this Act, publish a review of the impact of the Act on the availability and cost of consumer insurance.’.—(Chris Leslie.)
Brought up, and read the First time.
I beg to move, That the clause be read a Second time.
It is fortunate that we have the opportunity to debate the Bill on the Floor of the House on Report and Third Reading for a number of reasons. First, the Committee stage of the Financial Services Bill is currently under way upstairs in Committee Room 12, where the Financial Secretary, who usually deals with these issues, is answering the debate and addressing the many amendments that I and my hon. Friends have tabled. It is a shame that the Government saw fit to put only one Minister on that Committee, because it means that he is unable to join us in this debate. I have popped down briefly. It is a pleasure to see the Economic Secretary fielding the questions on his behalf. I have a number of them for her on the detail of the Bill.
Secondly, it is fortunate that we are having this debate on the Floor of the House because, rather bizarrely, the Government chose to take Second Reading upstairs in Committee. I did not know that such Bills could have a Second Reading debate on the Committee corridor, but apparently, under one of the more arcane Standing Orders of the House, Law Commission Bills can be debated upstairs in Committee on Second Reading and never usually see discussion on the Floor of the House. I do not believe that it is right for primary legislation not to have a hearing on the Floor of the House. That is an important principle. However, despite my objections, the Second Reading debate happened upstairs. I challenged the Financial Secretary to hold the Report stage on the Floor of the House and he eventually relented, under extreme pressure. I regard that as one of my greatest triumphs in opposition. It turns out that the Report stage could also have been taken in Committee, so this piece of primary legislation need never have seen the Floor of the House of Commons.
I realise that I have digressed, Mr Deputy Speaker, but I just wanted to show how fortunate we are to have the opportunity to debate the Consumer Insurance (Disclosure and Representations) Bill here today.
This is a broadly positive Bill. I place on the record my thanks to the Law Commission and the Scottish Law Commission, which in 2009, when the previous Administration were in office, published a joint report entitled, “Consumer Insurance Law: Pre-Contract Disclosure and Misrepresentation”. That report resulted in this Bill.
The new clause is simple and, I hope, relatively uncontroversial. I hope that the Government will accept it as a positive step forward. The many hon. Members who have joined us for this debate will know that consumer insurance is incredibly important to all our constituents. We are talking not just about life insurance, which members of the public might want to take out, but more day-to-day insurance such as household and contents insurance, building insurance, motor insurance, flood risk insurance, personal effects insurance, health insurance and even pet insurance. There are a number of insurance schemes that the Economic Secretary or my hon. Friend the Member for Clwyd South (Susan Elan Jones) may have taken out. Consumer insurance is, therefore, incredibly important.
Although superficially it looks as though the Bill changes only small aspects of contractual matters, it nevertheless gives us the opportunity to take stock of the state of the consumer insurance market and to ask where it is heading, particularly in the light of its provisions. The Bill has a number of important purposes, which I will touch on at Third Reading. Essentially, the story goes back to the 18th and 19th centuries, when a degree of common law had accrued and there were questions about a new contract for insurance. At the start of the 20th century, it was felt that the Marine Insurance Act 1906 needed to be placed on the statute book.
I note that the hon. and learned Gentleman recalls that from his history studies. Although, strictly speaking, the 1906 Act applies only to marine insurance, it has since been generally understood that it applies to all forms of insurance. Essentially, its provisions are the building blocks of the contractual process that is involved in the consumer insurance trade.
The hon. Gentleman will know that the 1906 Act, which was drafted by Sir Mackenzie Dalzell Chalmers, is commended to the House by many insurance lawyers as a wonderful piece of drafting. I suppose, as this is my first intervention in this debate, that I should refer the House to my entry in the Register of Members’ Financial Interests; I am an insurance practitioner. Does the hon. Gentleman think that it is a good idea for Parliament to intervene in this way, given that there are certain respects in which the 1906 Act altered the common law? For example, the test of loss in relation to marine insurance now differs from the test of loss in relation to non-marine insurance.
I am grateful to the hon. and learned Gentleman for bringing his experience to bear on this debate; it is incredibly useful. I suppose that, to a certain extent, we all ought to declare an interest in these matters as consumers, because some of our arrangements may be affected.
The hon. and learned Gentleman is right that the 1906 Act has stood the test of time for a considerable period, indeed for more than a century. I confess that I do not have a copy of it in front of me, but I will paraphrase its arrangements. It enshrined in law certain principles of disclosure. In particular, it placed a considerable emphasis on the requirement for the party seeking insurance to disclose any issues that might be broadly relevant in the insurance process. It did not require the insurer to ask a series of specific questions about the particulars of the individual being insured. That was left to the discretion of the insurer. That is part of contract law. Of course, common law has accrued since that time. Some serious problems have developed in recent decades in relation to where the balance is struck between the insurer and the person being insured. The onus falls perhaps too heavily on the person who is being insured.
For example, if you have taken out household contents insurance recently, Mr Deputy Speaker—I am not sure whether you have, but I suggest that you do, because it is a wise thing to do even though it can be quite expensive—you may have been asked a number of questions about the type of mortice lock you have and other things about your place of residence. If you did not volunteer particular data about the building in which you reside, how frequently you are away on business and so on, an insurer with a beady eye on avoiding an obligation to pay up could invalidate your insurance should you be unfortunate enough to be burgled and need to make a claim. That would be through no fault of your own, other than your failure to disclose a number of matters to the insurer.
Consumers up and down the country have had such problems for a long time, and they cause great frustration and sometimes a sense of mistrust between insurance companies and parties seeking to be insured. I therefore welcome the Bill, which has a large dollop of cross-party support. It will hopefully clarify the issue and move us on from the 1906 Act, however finely drafted it was. It will put in statute a clear and simple set of rules updating the law on pre-contractual disclosure, and it will address the problem of misrepresentations being made, sometime deliberately but often unwittingly. It is important that the accretion of case law, guidance and voluntary codes is superseded by this statute law.
It is important that we have the opportunity to review the Bill one year from its commencement, partly because of the good faith that many consumer bodies have placed in it. Many organisations have written to support the proposals in it, which is a very good thing. They have done a fantastic job of scrutinising the development of the Bill by the Law Commission. To assure those bodies that the Bill’s provisions have been the right ones to put on the statute book, a simple commitment to a review after a year would not be especially onerous.
Paragraph 17 of the regulatory impact assessment mentions that a number of additional claims payments might result from the tightening up of disclosure provisions under the Bill. They represent a fraction of total payments, but it will be interesting to see whether consumers receive payouts more frequently as a result of the specificity that the Bill will introduce to insurance contracts.
There are different types of insurance market, and we cannot simply lump them all together and assume that they will all be affected equally by the Bill. Certain insurance contracts related to the business sector are covered by other legislation in different parts of the world. There are certain consumer insurance contracts, however, that could be regarded as discretionary or luxury insurance. It might be desirable to have them, but they are not essential for daily life. For instance, the Government Whip may have a pet animal—a cat or a dog.
A llama? I did not know that. I am not sure I needed to know it, either, but the hon. Gentleman may choose to take out insurance on his pet llama. You might well ask yourself where this is going, Mr Deputy Speaker, but the key question is whether that is a luxury insurance product, or whether the hon. Gentleman has such affection for that pet llama—
In that case, he will feel that it is an absolute necessity to ensure that his llama always has pet insurance. He may well find that under the Bill, rather than simply taking out a generic insurance contract, he is asked a series of specific questions about his pet llama. They could include how long he has kept the llama, its age and the environment in which it is kept. He may well think to himself, “Well, this insurance could become quite expensive,” and feel that of all his insurance products, he can leave that one and take a risk. Poor old llama—it may well just have to take its chances.
Before the hon. Gentleman frightens my hon. Friend the Member for Lichfield (Michael Fabricant) away from insuring his llama, I will follow my hon. and learned Friend the Member for Sleaford and North Hykeham (Stephen Phillips), who declared his interest, and point out that I am a former director of NFU Mutual. That farming insurance company would find no difficulty whatever in providing insurance for a llama.
I think a deal has been transacted on the Floor of the House. However, under the provisions of the Bill, a series of disclosures may be requested from hon. Members seeking such insurance.
My point is simply that we need to know the impact that the Bill will have on pet insurance and other discretionary insurance, but also, perhaps more importantly, on essential types of personal insurance that we all want our constituents to have, such as household insurance, flood risk insurance and motor insurance. In those cases, there is less wiggle room for individuals to decide not to take out insurance.
There are separate discussions to be had in another place about the problem of certain drivers thinking, “Well, the fine that I get for driving uninsured is less than the cost of motor insurance, so I will take my chances and drive uninsured.” In my view, the penalty for driving uninsured needs to be higher than the cost of getting insurance. That is a pretty straightforward point, but you would be surprised, Mr Deputy Speaker, by the small fines that are sometimes issued to people who drive uninsured. I am sure that hon. Members will know of cases in which constituents have unfortunately been involved in accidents caused by uninsured drivers. When those uninsured drivers are prosecuted the fines are a pittance, which sends the message, “Why bother with insurance?” We must return to that issue, but it is a moot point whether it would fall under the scope of a review under the new clause.
Mandatory types of insurance are particularly important in the Bill. I can foresee circumstances, particularly with car insurance, in which the insurance sector feels that it is not getting much return. Many of our constituents howl with derision at the sheer expense of motor insurance—the AA recently said that it rose by about 16.4% in 2010. The Bill will make provision for the disclosure of certain extra pieces of information, even though people have no choice but to take out motor insurance if they want to drive; it is a legal requirement.
People will be surprised to find that even though motor insurance costs are escalating—that problem needs to be tackled in a number of ways—the insurance sector says that motor insurance is not massively profitable. The Association of British Insurers has described it as one of the most challenging products for insurers. I believe it has stated that premiums amounted to £10.7 billion and claims to £10.3 billion in 2010, so often the margins are not particularly great.
It is difficult for hon. Members, as non-experts in that trade, to know whether insurance companies are making significant profits, but let us take them at their word that they are not doing so. I can envisage a situation in which insurance companies say, “We want to back out”—pardon the pun, Mr Deputy Speaker—“of the motor insurance trade.” They might feel that in order to do so, they will deter new contracts for motor insurance. One way of doing that would be by placing a series of extra hurdles in front of customers wanting to obtain such insurance.
Many young drivers will know to their cost how difficult it can be to get insurance cover for their vehicles. I do not know whether the Minister has a driving licence—
She does have a driving licence.
I have insurance as well.
I am glad the hon. Lady has insurance—I would expect nothing less. The Government car service will certainly have insurance. Not so many years ago, when she was under the age of 25, she might have found it extremely difficult even to find companies that would insure her. She is doubtless a very careful driver with an unblemished record, and she might find it easier to get insurance as a woman driver, but many young male drivers find getting insurance incredibly difficult. My point is simply this: we need the ability to review the impact of the Bill to test what is happening in motor insurance, particularly for those drivers who struggle to get insurance.
Additional hurdles could be placed in the way of those drivers. I do not object to the shift in the balance of disclosure in the Bill—I want to put that on the record—but it is important that we take time to recognise that there could be circumstances in which those seeking motor insurance find it more difficult to get as a result of these measures. We just do not know, which is why we need a review one year after the commencement of the legislation.
Another aspect of a review would be households subject to flood risk. Apparently—I did not realise this until I researched it—one in six homes in the UK are subject to the “at risk” category in respect of flooding. Amounts paid out by insurers since 2000 exceed £4.5 billion. A recent article in This is Money said that annual flood damage claims are running at more than £1 billion each year, and that 200,000 homes could become uninsurable by 2013 if an agreement cannot be reached between the Government and the industry on high-risk areas. That is incredibly important to the affected individuals, whether in Hull, where people recently had difficulty in gaining insurance, or elsewhere.
The changes on disclosure could well affect the ability of individuals to take out an insurance contract. Many who have taken out flood insurance might have found, unwittingly, that they were unable to receive a payment even though a catastrophe had occurred—a flood, a river bursting its banks or whatever—because they did not realise they were supposed to disclose certain aspects.
I want a review of the Act after one year. The provisions will, I hope, improve the situation and we will find that more people can take out flood insurance in a way that means they and insurers are assured that the contract will be fulfilled and that payouts can be made following floods and other such eventualities, but we do not know what the impact of the measure will be.
The Bill is relevant to flood victims, for whom the cost of insurance—if they can get flood insurance at all—could increase 500%. It is therefore very important that we have a review to see what happens in such circumstances. It is important that we see what is happening in the market for discretionary types of insurance as a result of the Bill, but we also need a review of the essential, mandatory, roof-over-the-head types of insurance. For those reasons, it would be helpful if the Minister accepted that such a review will take place.
I rise to make only a short contribution. The new clause is misconceived. The Law Commission did not think it necessary, and with the greatest respect, the hon. Member for Nottingham East (Chris Leslie) has undermined his own case, because only in circumstances in which claims that ought to be paid have not been paid might there be any adverse impact on the costs of the types of insurance contract that the Bill covers.
I say to the hon. Gentleman and the whole House—to be fair, there is no one but him and the Opposition Whip on the Opposition Benches—that in this day and age, I am pleased to see the Bill before us. It is not only long overdue, and perhaps I shall speak to that on Third Reading, but it is inconceivable either that it will remove products from the market or add greatly to the costs of the type of insurance contract that it is designed to cover. I cannot help feeling that the hon. Gentleman will not wish to press the new clause to a Division.
I hear the hon. and learned Gentleman’s points, and I do not wish in any way to denigrate the importance of the Bill—it is an extremely positive and important measure—but the fact that it originated with the Law Commission does not necessarily make it perfect or negate the need for a review. He should not be under that illusion. Just because those fine minds at the Law Commission introduced the Bill does not necessarily mean that we should not scrutinise it.
I am not for a moment suggesting that the Bill should not be scrutinised.
Insurance companies ought to pay claims that they have not paid previously as a result of an inadvertent misrepresentation or non-disclosure—everyone wants that change, which is the reason for the Bill. The only way in which the costs of the types of insurance contract that the Bill covers will increase is if claims that ought previously to have been paid—legitimate claims—are paid. Disreputable insurance companies—I venture to suggest that there is none left in this country—currently might decline to pay a claim on a specious basis. For that reason, the review proposed in the new clause is unnecessary. I anticipate that the Government will not wish to carry it out, and the hon. Gentleman is rather hoist on his own petard because of the argument he has made in support of the Bill.
My hon. and learned Friend will know that arrangements are in place for the Financial Ombudsman Service to look at the circumstances to which he refers—when an apparently proper claim is declined by an insurance company on specious grounds. Notwithstanding the 1906 Act, the financial ombudsman has, under the “treating customers fairly” provisions, which were put into operation by the Financial Services Authority, many times ordered a payment to be made. Is that not one of the reasons for the Bill? The situation will be that legislation rather than the financial ombudsman will be involved in righting wrongs.
My hon. Friend makes a valid point. The insurance industry has long been regulated and the ombudsman has long been able to make declarations, but there are circumstances in which one cannot go to the ombudsman—for example, if the financial value of the contract is too high. There are circumstances in which the ombudsman will not intervene—for example, if legal proceedings between the consumer and the insurance company or, if Lloyd’s, some other insurer, are already afoot. In addition, experience dictates that the financial ombudsman is not, for example, particularly au fait with some of the more obscure parts of insurance law with which the Bill grapples, such as those parts of common law that deal with basis clauses and the turning of representations into warranties when made the basis of the contract.
I hear, then, what my hon. Friend the Member for Cardiff North (Jonathan Evans) says, but it is fair to say that the Bill is not only welcome but contains proposals that the Law Commission has properly considered and requires no review of the type that the new clause contemplates. For those reasons, the new clause is, in my respectful view, misconceived; and for those reasons, I am sure that the hon. Gentleman will not push it to a vote.
I was rather attracted to the new clause tabled by the hon. Member for Nottingham East (Chris Leslie). The idea that the House should engage in post-legislative scrutiny is a good one and accords with good legislative practice. That, effectively, is what he is saying. He is not saying that the House would necessarily be involved; he is saying that the Treasury, the Department sponsoring the Bill, would have an obligation to assure everybody about the impact of legislation. This could be an important precedent. Perhaps, in due course, it will be part of official Opposition policy to provide for post-legislative scrutiny.
This area of insurance is extremely complicated and, as the hon. Gentleman said, very expensive for many people. The reason it is so expensive is that there is an enormous amount of fraud, particularly in relation to motor accidents. We heard recently about the high incidence of claims for whiplash. Almost everybody involved in even the most minor bump is encouraged to claim on their insurance for whiplash injuries, and invariably the insurance companies end up paying a lot of money to prevent what they would describe as nuisance claims from going to full litigation. Effectively, they are held to ransom, and not surprisingly it is the customers of those insurance companies who end up paying the bill through higher premiums.
That situation is particularly pernicious with compulsory insurance, which motor insurance is—third party, fire and theft, and so on—for people seeking to drive a motor vehicle on the road. It is particularly tough on young people, and has been made tougher by this ludicrous European legislation declaring that insurance companies cannot take account of whether a young girl belongs to a class group with a lower claims rate than a young man who belongs to a group with a higher claims rate and who therefore will face additional costs.
As a consequence, the premiums for young women have increased significantly faster than premiums for young men. I suppose I have a family interest, because my daughter has recently acquired her first car and taken out her first insurance policy. I can reconfirm what the hon. Member for Nottingham East said. Obviously, she did not have a no-claims record, because she did not have any driving experience, and in the end, the best deal was from a company offering her 10 months’ insurance, which gave her the prospect of getting a no-claims discount after 10 months rather than after a year.
There might have been another reason for the 10 months: the European decision to which my hon. Friend referred comes into operation in 10 months' time.
My hon. Friend is ahead of the game. I was interested in his earlier intervention declaring his knowledge and experience of one particular insurance company—a company from which we sought a quote but which was extremely reluctant even to consider providing insurance cover at a reasonable price. The reason was that it did not want to engage in this market and had recently changed its policy. It is a pity that this mutual insurance company has decided that the pressures are such that, even for long-standing customers, it is not prepared to take on, at a reasonable price, the sort of risk to which I have referred.
It is easy to go unnecessarily wide on such an issue—perhaps I was led astray by the hon. Member for Nottingham East because of the width with which he introduced his new clause. However, I look forward to hearing the Minister respond to the idea of post-legislative scrutiny. Perhaps, Mr Deputy Speaker, if she could fit that point into the scope of her response to this short debate, she will say whether it might become Government policy to make post-legislative scrutiny the norm rather than the exception. I hope, at least, that she will come forward with some strong and persuasive arguments so that I do not have to join the hon. Gentleman in the Lobby in support of new clause 1.
That probably goes too wide for this particular debate. I call Chloe Smith.
I welcome the three contributions and the interventions we have just heard. I wholeheartedly welcome the cross-party support that the Bill enjoys overall. In responding to the points made, I am sure that I will make my hon. Friend the Member for Christchurch (Mr Chope) happy today. I also take this opportunity to thank my hon. and learned Friend the Member for Sleaford and North Hykeham (Stephen Phillips) for his learned and helpful contributions.
On a brief note of discord, I am afraid, I must recommend a purchase to the hon. Member for Nottingham East (Chris Leslie), who kindly recommended motor insurance to me and llama insurance to my hon. Friend the Member for Lichfield (Michael Fabricant). I must recommend to him the Standing Orders of the House of Commons—he can purchase a copy for a mere £10, if he cannot find a copy in the Library—page 53 of which contains the answer to his questions about Second Reading Committees in relation to Law Commission Bills. I recommend that reading to him.
I will address the new clause in some detail and answer the question about review. I think that my hon. Friend the Member for Christchurch will be pleased to know that the Treasury is already committed to a post-implementation review of the Bill in three to five years which will examine whether the Act, as we hope it will then be, has achieved its objectives, identify whether there are any unintended consequences, and assess the costs and benefits of the legislation. I say to the hon. Member for Nottingham East, then, who might press his new clause, that given that it seeks a review, it is an unnecessary addition to the Bill.
It is also unnecessary, particularly in the context of the Bill, to draw our attention to the cost and availability of consumer insurance, because the Government already take those issues very seriously. We do not need a review of the Bill to draw attention to the issues because we are already taking action on them. I will go into two of the areas that the hon. Gentleman mentioned: motor insurance and flood insurance. Hon. Members will know that three weeks ago the Prime Minister met the insurance industry and consumer groups to discuss rising premiums and the steps that we will take to bring them down.
On motor insurance, the Government have already taken a wide-ranging series of actions to tackle the rising costs of car insurance, and we are committed to doing even more. We are proceeding with a series of legal reforms that will reduce the costs associated with personal injury claims. The cost of claims following motor accidents is a crucial driver of insurance premiums, and we think that under the current system too many people can profit from minor or spurious accidents at the expense of motorists. We expect our ban on referral fees and our reform of no win, no fee agreements to reduce both the level of fees and the number of frivolous claims. We have also committed to reducing the £1,200 fee that lawyers can currently earn from small-value personal injury claims. In return, insurers have committed to ensuring that those savings will be passed directly on to policyholders, which I am sure all hon. Members here today would welcome.
However, there is still more that we can do to reduce the unnecessary costs of personal injury. According to the Association of British Insurers, one person in 140 claims compensation for whiplash every year in the UK, which amounts to many more claims than in 2008, when they cost £2 billion. That adds a substantial cost to premiums. We are now working to identify effective ways to reduce the number and cost of such claims. Options include improved medical evidence and technological breakthroughs, as well as looking at the threshold for claims or the speed of accidents. Progress on that will be made in the coming months. We are taking steps now, thus negating the need for the new clause.
Although those steps will help to reduce costs for all motorists, we are aware of the particular difficulties facing young drivers. I shall perhaps not gratify the hon. Member for Nottingham East by putting my age on the record—he may know it from elsewhere—but we recognise that the cost of insurance can be prohibitive for some of those facing premiums in the thousands of pounds. Importantly, we also recognise the effects that this can have on employment prospects. At the Prime Minister’s summit, the Government and the insurance industry committed to working together to look at what more can be done about young drivers’ risks and safety. A key prospect for improving affordability for that group could be the wider use of telematics or smart-box technology. I have no doubt that Miss Chope might be one of the early adopters of such technology—we never know—which gives young drivers the chance of affordable car insurance by adopting safer driving.
Let me turn to flood insurance, before swiftly wrapping up on this new clause. I am sure that there will be interest in this issue across the House, and particularly among constituents in households that are, or might be, at high risk of flooding. Domestic insurance that covers flooding is currently widely available, even in areas at significant flood risk, and at similar prices to elsewhere. Around 80% of households at significant risk that purchase insurance do not, however, pay a price that reflects their flood risk; rather, they are subsidised by those at lower risk, which pay higher premiums. The Government therefore have an agreement with the insurance industry—known as the statement of principles—which commits insurers to offer cover to properties at significant flood risk where plans are in place to reduce that risk within five years. The agreement is due to end on 30 June 2013, and insurers refuse to renew it on the basis that it distorts the market.
More crucially, there is a continuing market trend for insurers’ pricing to be more risk-reflective as better information on flood risk becomes available. In the absence of intervention, insurance may become more costly or, in a small number of cases, unavailable for some customers at high flood risk. The current statement of principles says nothing about the price of cover, and therefore does nothing for those households that might face premium increases. On the theme of action we are already taking, we continue to work with insurance companies to consider measures that might help to safeguard the affordability of flood insurance for households. As part of that ongoing work, we will be considering the feasibility, value for money and deliverability of targeting funds to help those most in need. That includes models suggested by the ABI, which involve subsidising insurance premiums. We have committed to providing details in the spring, which will give insurers certainty more than a year in advance of the expiry of the current agreement. The priority will then continue to be to invest in reducing the risk of flooding in the first place. Action to reduce flood risk plays a vital role in bearing down on insurance costs. The Government are investing £2.17 billion on flood and coastal erosion risk management in the spending period up to March 2015, which will provide better protection to more than 145,000 homes.
In conclusion, the Government continue to take the impact of the availability and affordability of consumer insurance very seriously indeed—I have given two examples, motoring and flooding. The new clause, which seeks to add broad provisions to the Bill, is therefore not necessary to ensure that consideration is given to those issues. I would therefore ask the hon. Member for Nottingham East not to press his new clause.
I am grateful to the Minister and other hon. Members for taking the time to reflect on my new clause, which I do not think would be particularly onerous. It is important that we should have the opportunity to test the impact of the Bill, which is quite significant, given some of the changes—albeit welcome ones—that it is making to the contractual process.
In the new spirit of accord with the hon. Member for Christchurch (Mr Chope)—in which I so frequently find myself, particularly given his recent comments about the Government’s ridiculous plans for child benefit—I am quite taken by his suggestion of post-legislative scrutiny. Ensuring that we properly reviewed certain provisions in statute would be a useful initiative to take; indeed, in many ways that is why we tabled this new clause. The Minister has helpfully set out the Government’s view in those areas on which I want a review to focus. She believes that the Government are taking steps to deal with some of the difficulties in motor insurance, but I have to say that I disagree. I do not think that enough measures are being taken to help consumers who find that market particularly difficult. Also, the cuts in the flood defence budget are raising the prospect of householders being flooded more frequently, about which many constituents will be concerned.
However, I understand the Government’s general commitment to keep an eye on the issue. The Minister implied that the new clause was not necessary. It is a shame that she was not able to accept it, but given that we have at least had the chance to air the issues, and on the Floor of the House too—despite the ridiculous provisions of the Standing Orders of the House—I am more than happy not to press the new clause. Obviously we do not want to dwell on it for too long, and I think the point has been made. I therefore beg to ask leave to withdraw the clause.
Clause, by leave, withdrawn.
Disclosure and representations before contract or variation
I beg to move amendment 1, page 1, line 22, at end insert—
‘(3A) It is the duty of the insurer to show regard to the principle that a burden or restriction which is imposed on a consumer through requests for particulars before a contract is entered into should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.’.
If hon. Members look at line 22 of page 1, right at the foot of the Bill, they will see a simple provision that states:
“It is the duty of the consumer to take reasonable care not to make a misrepresentation to the insurer.”
It follows a provision in clause 2—one of the most important in the Bill—that refers to the “disclosure and representations” that consumers need to make to an insurer
“before a…contract is entered into or varied.”
I tabled an amendment in Committee that was specifically designed to challenge the Government in respect of the burden that might fall on consumers under the new provisions in this Bill.
I support the Bill; I think it is important. I want more clarity and disclosure, as the contractual arrangement needs to be clearer and more transparent. However, there is a small alarm going off in the back of my mind—I have a minor anxiety—that we might unwittingly create circumstances in which an individual faced with having to answer a barrage of extra questions, or fill in page after page of forms that they perhaps did not have to fill in before, may well think, “I can’t be bothered with this particular insurance cover,” especially if they feel it to be a discretionary area of cover, rather than a mandatory area, such as car insurance. Faced with that weight of administration and bureaucracy, those individuals might say, “I just don’t have the time or the inclination for these dozens and dozens of questions,” and might therefore go without insurance cover when that would be neither a prudent nor wise thing to do.
Faced with a constituent in one of our surgeries who asked, “Should I take out household insurance cover?”, “Should I take out contents and building insurance”, and so forth, most of us would say, “Absolutely you should. You don’t know what’s around the corner. There could be any number of things that fate could bring upon your shoulders. Therefore, you really ought to regard this as essential.” In the dreadful economic circumstances that the Government are presiding over, many hard-pressed families might decide that certain things will have to give, and I am sure that the cost of insurance is on many people’s minds. Adding to the consideration of cost the idea that people have to go through onerous processes and jump through hoops to get the insurance could take a certain category of person to a tipping point. Such a consideration could be the straw that breaks the camel’s back, leading them to conclude that they just cannot be bothered to fill in the forms for that insurance cover at that point. Many of us will have been there. We will have seen a particular product and made a note in the diary to investigate it, but, when faced with the hurdle of filling in the forms and getting involved in the bureaucracy, we have found that it falls down our list of priorities. That is the point that I want to test with the amendment.
In Committee, I framed the amendment incorrectly. The amendment that I tabled at that point related to circumstances in which a consumer varies a contract that they have already taken out. As the Minister will know, when she reapplies for her car insurance, the insurer will already have details of her address and driving habits on record. Renewing an insurance contract is therefore not particularly onerous, because not all the questions need to be asked afresh. She will be able to tick a box to “re-answer” them. In Committee, the Minister explained that my amendment was unnecessary as there were ways of varying contracts quite efficiently.
I have therefore tried to reframe the amendment so that it relates particularly to new insurance contracts. It is aimed at the individual who has perhaps not had car insurance or owned a house before, and who decides to start from scratch with a new insurance contract. In the amendment—I hope that hon. Members will forgive the slightly flowery legislative language that is sometimes used in such provisions—I have proposed the addition of a new subsection:
“It is the duty of the insurer to show regard to the principle that a burden or restriction which is imposed on a consumer through requests for particulars before a contract is entered into should be proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction.”
I know that many hon. Members have concerns about regulatory burdens, but we must be careful, because regulations are sometimes necessary for the protection of individuals and of society at large. We should always keep a watchful eye on the burdens that such regulations impose, however.
The regulatory impact assessment that accompanies the Bill shows that the costs that will fall on the consumer will not be particularly onerous, which is why I support it in general terms. In pounds, shillings and pence terms, the costs will be negligible. The assessment estimates that an additional £700,000 a year will be saved by the insurance sector as a result of the provisions in the Bill, and that if there is an extra charge to consumers, it will probably be 2p or 3p for every £100 of insurance. I am therefore not concerned about the cost as a burden. The burden that I am flagging up is the administrative burden, the non-financial burden, that might fall on the shoulders of the consumer.
Will the hon. Gentleman tell us who will be responsible for determining whether the new duty that the amendment seeks to impose is being fulfilled?
Ultimately, the courts would have to be the arbiter in relation to those arrangements. This is the kind of thing that tends to get drawn into a judicial review, although I would hope that it will not need to be tested in that way. I am simply introducing a principle that I would like insurers to have regard to when they frame the questions, the tests and the requirements that they place on the shoulders of the consumer.
Under this Bill, insurers will be made to ask questions that are much more specific than has been the case up to now. People who find form-filling particularly onerous or difficult might decide that they simply cannot be bothered to go through the process, and they are the people I am worried about. This is not necessarily about people’s literacy levels, or their boredom thresholds or their propensity to fill in forms. This amendment is quite material to the Bill.
So, in reality, the only way for a consumer to enforce this duty would be to take the company to court; otherwise, he would be relying on the good nature of the insurance company, would he not?
Indeed, that is the very nature of the measure, but that does not mean that, in the course of changing the disclosure requirements, we should not try to frame the duties that insurers have to abide by. I do not know whether hon. Members have visited moneysupermarket.com or confused.com recently. They are aggregator websites on which a number of insurance companies share the questions that people have to answer in order to take out an insurance contract. The websites show the range of insurance contracts that are available. Quite honestly, I think that the way the aggregator companies will deal with the Bill is another matter, but I challenge any hon. Member to say that their boredom threshold has not been reached after they have filled in 15 or 20 pages of a form. Having said that, I think that many hon. Members—especially those who are in the Chamber at the moment—must have particularly high boredom thresholds. I know that from many hours of experience in these debates. Notwithstanding that propensity to sit through long, technical discussions, however, I believe that form-filling is quite a different matter.
My point is about the administrative burden in relation to new contracts. I want us to ensure that we protect the section of society that I have been describing. I can envisage us all being visited at our surgeries in the years ahead by constituents telling us that they did not take out insurance not because of the cost but because the form-filling was just too much for them. They will tell us that they regret that, but that there were just too many questions to answer. I hope that the Minister understands why I have framed the amendment in this way. It is an important provision, and I hope that she will address it.
The hon. Member for Nottingham East (Chris Leslie) has again done the House a service in raising this issue. He has spoken of the need for proportionality. I disagree with the way he has worded his amendment, however, as it is rather hard in law to place a duty on an insurer to “show regard” to a principle. Given all the other qualifications in the amendment, it would, in practice, by unenforceable.
Is the hon. Member for Nottingham East (Chris Leslie) not making rather heavy weather of this matter? Will not the market take care of it? If one insurer on its own presented reams and reams of questions, and the others did not, surely the potential customer would simply go elsewhere.
My right hon. Friend anticipates my next point, which was to say that this should be, and will be, sorted out in the marketplace. Perhaps a new company called Simple Insurance could be formed—if no such company already exists—with my hon. Friend the Member for Cardiff North (Jonathan Evans) as a director. It could promote itself on the basis that it would ask just a few easily answerable questions that would not prove too burdensome. I agree with my right hon. Friend that that would be a better way of dealing with this matter. However, the amendment underlines the fact that many of the forms are far too complicated and intimidating, to the extent that people often tick all the boxes without looking at the small print. That is how many of them get into difficulties. These forms are often not filled in by the persons themselves but by somebody on the end of a telephone. Again, that can lead to difficulties of language or understanding. It is not just my hearing that sometimes makes it difficult for me to understand what people are saying on the other end of a phone when they are seeking information. There are some important issues here, but I do not think that the amendment has proposed the right solution to the problem.
I shall answer a few questions. On this amendment, I am indeed with my hon. Friend the Member for Christchurch (Mr Chope) and my right hon. Friend the Member for East Yorkshire (Mr Knight), as I believe that the market will assist us in this area. I shall deal with the amendment principally on that basis.
The amendment, as hon. Members will have seen, would create a duty for insurers to make disclosure requests that are proportionate to the benefits generated. Following discussion in Committee, we return to the issues today; I hope I shall be able to add to what my colleague, the Financial Secretary said there.
There is no disagreement with the principle that the burdens on consumers should be as light as possible. That applies to the group of consumers mentioned by the hon. Member for Nottingham East (Chris Leslie) and, indeed, to all others who wish to purchase insurance. As the amendment rightly recognises, there is a balance to be struck between burden and benefit. The Government believe this balance is best struck by the Bill as it stands, with commercial pressures operating as a factor in that case.
I shall recap those points shortly, but I want to set out some background information on the types of questions currently asked, as I know Members were interested in that topic in Committee. They were particularly interested in the average number of questions asked when consumers enter into different types of insurance policy. I was able to take only a rough look at such things, but for some current policies it can take about 13 to 18 questions to underwrite home insurance and 12 to 18 to underwrite motor insurance. Requirements linked to these straightforward, mass-market products do not on this rough measure appear to be at all excessive. Simply counting questions, however, rather misses the point.
If insurers asked only a single question, this would be far more burdensome for consumers. I think it is much easier to answer a series of short, targeted questions—and this Bill sets out that they must be specific and clear—than it is to answer a single general question like “Has anything changed?” or “Is there anything I need to know?”
The Law Commission undertook a more sophisticated analysis of burdens on consumers, which was contained in its first discussion paper and has informed the development of this Bill. It discovered real problems in 2007 with the questions being asked in life and critical illness insurance. For example, one insurer asked, “Have you had any physical defect or infirmity, or is there any ailment or disease from which you suffer or have suffered or to which you have a tendency?” This seems impossibly difficult to answer and appears to require the consumer to begin at birth and work through every single visit to the doctor. Yet that might qualify as proportionate under this amendment because it is only one question. Reassuringly, there have been significant moves in this sector to improve the questions since 2007. The design of this Bill will further promote this improvement.
It is worth explaining briefly—I think the hon. Member for Nottingham East referred to this earlier—that different consumers face a different set of questions in order to purchase a similar policy by virtue of the channel they choose, whether it be through an aggregator, by telephone or face to face in a broker’s office. There is a need for insurers to tailor the requests they make in these different ways.
The burdens placed on consumers form the nub of the issue, and there is evidence that insurers already pay careful attention to those burdens. It has already been argued tonight that this is partly driven by market pressure, so let me add to those arguments. Clearly, a consumer has the choice to purchase from an alternative provider if disclosure burdens are too high. Indeed, some insurers have advertised products on the basis that they are easy to purchase. Comparison sites consistently study these drop-off rates and try to make the process as easy as possible.
It strikes me that no business wishes to run the risk of losing a customer entirely—the scary scenario that the hon. Member for Nottingham East has set out. No business would wish to do that because it would represent the loss of a customer. We hope that no consumer would wish to be in that position, as they would not then get the security of the product that they are looking for.
There are, of course, some savings to be made for insurers who get the right balance between getting the information they need and making it easy for consumers to purchase their product. The cost of asking another question is not insignificant, and insurers are well aware of that when they design their questionnaires. I refer the House to a PricewaterhouseCoopers report in November 2007, which considered the financial impact of the Law Commission’s insurance project as a whole. It estimated that increasing underwriting by two to three minutes per policy would equate to up to an extra £3,600 per 1 million of gross written premiums—equivalent to around an extra £150 million spent in the UK general insurance market alone. That does not include other costs associated with asking more questions, such as for the gathering and processing of the data. It is clear that there is a strong existing incentive for insurers to ensure proportionality.
I shall deal briefly with the Bill’s other provisions, in case Members do not already find the arguments about market pressures compelling enough to rely upon tonight.
Two further features of the Bill mean that if insurers impose burdens on consumers, they might undermine any right they have to refuse or reduce a claim. Under clause 4(1)(b) an insurer is not entitled to a remedy unless they can show that a consumer’s misrepresentation induced them to enter into the contract—at all or on its current terms. As a result, the Bill creates no benefit for insurers if they ask questions to seek answers on which they would not need to rely. Furthermore, under clause 3, a long and complicated questionnaire might have a bearing on whether a consumer has taken reasonable care not to make a misrepresentation. Insurers are at greater risk of having to pay claims, despite not having been given the correct information, if they make things difficult for the consumer. So in my view, there is no danger that the Bill will place extra burdens on consumers—as a result of those two measures in addition to the market forces mentioned earlier. Our impact assessment does not expect the Bill to result in significant changes to the questions asked by insurers. Rather, the Bill brings the statute into line with existing best practice and regulation. It is fair to say that we are updating the law, not altering the approach of insurers.
I do not believe that it would be beneficial for this Bill to go further than it does by seeking to change practice by prescribing the content and number of insurers’ questions. If we were to prescribe or limit the information insurers were able to seek, it might even increase premiums. Let us take, for example, the recent European Court of Justice ruling—one hon. Member has already referred to it—on the use of gender in insurance pricing, which shows that limiting the risk factors that insurers can use will increase the average cost of insurance.
Creating a duty for insurers in primary legislation would not be the appropriate solution. We continue to work closely with the insurance industry on this issue and with consumer groups on a range of issues. Where there are specific concerns about practice in certain parts of the market, the Government have worked with the industry on guidance. Accepting this amendment and creating a provision is unnecessary. It will throw out the careful balance in the Bill, and it is not the most effective way to make sure that consumers do not face excessive burdens. I therefore ask the hon. Gentleman to withdraw his amendment.
I hear what the Minister says, but I do not agree that she needed to dig through the barrel of reasons to resist the amendment. I know that officials tend to list a number of reasons—typically to address drafting or other deficiencies—but when she talks about upsetting the balance of the Bill as a whole simply to place a duty on insurers to show regard to a principle about the imposition of a burden or restriction being proportionate to the benefits, I think she is going a little too far. However, the aim of the amendment was to test the position.
I am not entirely convinced that we will not encounter circumstances in which consumers in a certain category will be deterred when faced with more specific questions involving the disclosure of their particulars in an insurance contract. In a sense there is a link with new clause 1, which might have provided a better way of dealing with the matter. I want to have a sense of how many people might be deterred from taking out an insurance contract in a year or two because of the administrative burden that we are discussing. However, I have had an opportunity to air the point, I think the Minister has done her best to address it, and, as I have said, I do not want to denigrate a Bill that has broad support and introduces positive changes.
We shall keep a close eye on how the situation develops, but I beg to ask leave to withdraw the amendment.
Amendment, by leave, withdrawn.
On a point of order, Mr Deputy Speaker. It has now gone eight o’clock. In an act of indulgence, a number of us allowed the Government to remove the normal constraints on private business so that the three hours allotted to it could begin later than 7 pm. However, it seems to me that, given the prospect of a reasonably lengthy debate on Third Reading of the Bill that we have been discussing, it is open to the Government to adjourn the Third Reading debate until another day, so that the three hours allotted to the private business can proceed immediately.
That is not a matter on which the Chair can intervene. It is a matter for the Government’s business managers to consider.
I beg to move, That the Bill be now read the Third time.
I shall do my best to be brief but comprehensive. I think that Members on both sides of the House can agree that the current law relating to pre-contractual disclosure and representation in connection with consumer insurance contracts is unreasonable. I think we can also agree that the alternative practices favoured by regulators and insurers, although not always consistent, give the consumer far better protection from the unreasonable refusal of claims. The Bill updates the law to reflect what has rightly become market practice, and in doing so it clarifies the duties of consumers and how they can expect to be treated by insurers.
On behalf of my hon. Friend the Financial Secretary to the Treasury, who began the process, I thank all Members who have spoken during the Bill’s passage and who have, without exception, recognised that it constitutes a valuable and much-needed updating of statute. We also owe thanks to the Law Commissions, whose joint report on the issue and extensive work has produced a Bill that implements this change with the backing of a wide range of consumer groups, as well as that of the industry and regulators.
The drafters of the Marine Insurance Act 1906, if they are still with us, will not have envisaged the ways in which consumers currently purchase insurance cover for such purposes as their homes, their cars or their health—or their llamas. They will also not have envisaged the existence of the comparison website, and the way in which it requests information from consumers.
In October 2010, a letter with a range of signatures was sent to The Times in support of the Bill. It described the current law as designed to
“govern face-to-face commercial insurance deals in the coffee houses of Georgian London.”
The 1906 Act is not suitable for the modern insurance market, especially as it contains harsh penalties for reasonable failures to disclose or accurately represent information by those purchasing insurance. The Bill replaces the current burdensome duty requiring the consumer to provide all information that might influence the judgment of a prudent insurer with a requirement for consumers to take reasonable care to answer the insurer’s clear and specific questions. It also makes penalties for non-disclosure or misrepresentation proportionate, rather than allowing the insurer to legally void the contract in all cases. Consumers have been protected by the Financial Ombudsman Service—which has been applying those proportionate remedies for some time—as well as by market practice and Financial Services Authority rules, but there are real benefits in aligning the law with that practice.
In some circumstances, the different legal and regulatory positions cause problems for both industry and consumers. At present, the FOS receives about 1,000 complaints a year about non-disclosure and misrepresentation. About half the insurers’ decisions are upheld, a figure we would expect to be much higher if there were sufficient clarity about the rules. That indicates that insurers find it difficult to locate and interpret the relevant rules.
We believe that those two key provisions—the change in the duty of the consumer and the provision of a proportionate rather than a harsh set of remedies for the insurer—shift the balance of the law in favour of the consumer. Some parts of the Marine Insurance Act are heavily biased in favour of insurers, and the Bill attempts to rectify that bias.
Has my hon. Friend or her Department produced any estimate of the likely reduction of the burden on the Financial Ombudsman Service?
Some estimates have been made, and I believe that my hon. Friend will find some of them in the impact assessment, but I am sure that my hon. Friend the Financial Secretary will be happy to deal with the point in more detail.
The Bill takes a high-level approach, updating the principles set out in law to bring them into line with good practice rather than attempting to set out prescriptive detail. That should help to prevent the law from becoming outdated again as market practice develops.
I hope that Members will accept the advice of consumer representatives who wrote to the Committee—including Age UK, the British Heart Foundation, Consumer Focus, Macmillan Cancer Support, the Trading Standards Institute, Which? and UNLOCK—and will give the Bill its Third Reading.
I join the Minister in welcoming the Bill. It was prompted by a Law Commission report in the days when we had a Labour Administration. The recommendations were made back in 2009, and I am glad that the present Government have seen fit to accept them,
As I said earlier, these are incredibly important changes. They put some of the more opaque and obscure elements of common law and voluntary codes into a more statutory form, thus placing them beyond doubt. They update the law in relation to pre-contractual disclosure and clarify the rules about misrepresentation, making a distinction between consumers who, perhaps unknowingly, misrepresent their circumstances, and those who knowingly mislead insurers.
There have been circumstances in which insurers have used the opacity of the common law to take advantage of consumers who were unable to make a claim because they did not disclose a particular aspect of their lives to the insurer at the time of the contract. In some particularly insidious examples, people who had developed cancer or multiple sclerosis were unable to receive insurance payments because, although they had not known that early symptoms might develop into a more serious long-term condition, their insurers told them that they should have mentioned a tingle in their feet, or some other symptom that no one would expect to be the beginning of a more serious disease. I am glad that the Bill will close some of those loopholes.
We do not want consumers to have to have recourse only to the Financial Ombudsman Service to gain redress. The current rules are inadequate, we need the courts to be able to rely on clearer legal statute to clarify the arrangements, and the Bill achieves that. It abolishes the consumer duty to volunteer information in a more general, non-specific way. It also clarifies arrangements for group insurance, life insurance and rules on intermediaries. We therefore think this is an important Bill. I am glad we have touched on some of these important questions, including the state of the motor insurance industry and why more action needs to be taken to help consumers in that regard.
In this Bill, has consideration been given to the differentials in prices across the United Kingdom? Northern Ireland has the highest insurance premiums in the entire United Kingdom. Is it not time to have the same competition in Northern Ireland—
Order. We are now on Third Reading, and questions must be relevant to that stage.
That was an important point, however. There are regional disparities in consumer insurance. We tried, through an amendment, to—
Order. The hon. Gentleman is an experienced Member and he should know that on Third Reading we cannot discuss what was not in the Bill. We must make progress.
Your strictures are very firm, Mr Deputy Speaker, and I would not in any way want to stray out of order. Suffice it to say that this Bill will, I hope, help all parts of the country, especially the regions where we need to ensure that insurance standards rise.
It is a shame that the hon. Member for Lichfield (Michael Fabricant) is no longer in the Chamber. We were talking about pet insurance, and I did not realise that he owned a llama. Perhaps he has gone to groom his llama.
This has been an important debate, and I am grateful to all Members who have contributed. Although we must keep an eye on the impact of its measures, we support the Bill.
I hope we will have no further mention of the llama of the hon. Member for Lichfield (Michael Fabricant).
You will not hear any from me, Mr Deputy Speaker.
I wish to detain the House briefly in order to place on record the contribution to this Bill of the all-party group on insurance and financial services, which I chair. The group met on 1 December 2010 at the request of the consumer bodies to which my hon. Friend the Minister referred. I am glad the shadow Minister referred to multiple sclerosis, because the Multiple Sclerosis Society was one of the groups that asked us to examine this area of the law.
We were told that this area of the law has, in fact, been under review since 1980. In the 1980s and 1990s the shortcomings of the operation of consumer law were apparent. A scoping paper was produced in 2006. The Law Commission then produced its proposed legislation, but it was not enacted, despite the fact that in 2009 a request to do so was made to the last Labour Government. The reason for that was—[Interruption.] No, this is not a party political point. The reason was that the Association of British Insurers had responded in a letter, expressing its broad support for the recommendations but adding that there were still issues that needed to be addressed
“before we could support the Bill entering the process for uncontroversial Bills.”
That sets the context for the all-party group’s contribution. We had our meeting on 1 December, and we heard from Mr David Hertzell, the law commissioner who is the author of this legislation. He also attended the special Public Bill Committee that was set up as part of this process. We also heard from Mr Peter Tyldesley, a senior lecturer in insurance law at Bedfordshire university, a consultant to the Financial Ombudsman Service and a lawyer at the Law Commission. Both of them told us it was necessary to have the buy-in of the ABI before we would be able to make use of the uncontroversial Bills process.
This is the first Bill that has gone through that new process. As a result, there was no Second Reading on the Floor of the House and there was a mere 29-minute Committee sitting, and in the Lords there was a special Public Bill Committee. That was possible because the legislation is uncontroversial.
Following our meeting with David Hertzell and Mr Tyldesley, we contacted the ABI and it came back within three days clarifying that its letter had been misinterpreted, and that as far as it was concerned the Bill could proceed on the current basis. Within a few weeks, that happened.
As there is a review taking place of all-party groups, I wish to stress the constructive contribution that this all-party group made in this instance. I pay tribute to my colleagues on that group for their contribution to this excellent measure.
I thank all Members for their comments on Third Reading and at other stages. This Bill will produce a long overdue update of the law. I am pleased that we all recognise the value it brings for customers as well as the industry. The only final additional point to make is that it is clearly right that our regulators have adopted an approach more reasonable than that set out by the current law, but we need clarity and consistency between regulators and the courts, which this Bill provides.
I commend the Bill to the House, and I hope it will be welcomed elsewhere, as it has been here tonight.
Question put and agreed to.
Bill accordingly read the Third time and passed, without amendment.