Over 37,000 people have bought policies against being abducted by extra-terrestrials – just one example of how greedy insurers prey on our fears. Teresa Hunter looks at how they sell us cover we don’t need or have already.
INSURING against the risk of being abducted by an alien from outer space may not be high on your list of financial planning priorities. But 37,000 people are sufficiently spooked by the prospect of a close encounter to have paid £100 apiece to cover themselves against just such an eventuality.
Grip, the London insurer, has earned an easy £4 million from this “X-files” obsession. And you will not be surprised to learn that it has yet to pay out on a single claim. Agents Mulder and Scully eat your heart out.
You can insure against almost anything, from turning into a vampire to being injured by a poltergeist or discovering the Loch Ness monster. And people do, in their thousands. They are undoubtedly nuts, of course. But insurance companies are just as happy to exploit paranoid tendencies in other areas.
British consumers are conservatively reckoned to spend at least £4 billion a year on insurance policies that they simply do not need, according to research conducted by The Telegraph.
Cynics would say that is the name of the insurance game. The industry has long thrived by creating products that pander to irrational fears which can be transformed into mass-market essentials by hard-sell tactics.
Some academics have concluded that early insurance companies got rich by exploiting fear of “body snatchers” among the urban poor of Victorian England’s disease-ridden cities. An explosion in the sale of penny life policies coincided with the 1832 Anatomy Act giving hospitals the right to claim for medical experimentation the bodies of anyone whose family could not afford a proper burial.
Today’s watchdogs’ latest bugbear is a new breed of internet insurers promising to protect policyholders if an online purchase goes wrong. Jenny Mac, a trading standards officer, said: “If you have paid with your credit card, this insurance is pointless. You are already covered. Consumers are being encouraged to buy something that is superfluous.”
A big area of abuse is life insurance, where many borrowers are forced to buy cover to qualify for a mortgage from lenders such as HSBC, Newcastle Building Society and Bank of Ireland. Even where cover isn’t strictly obligatory, most lenders “strongly recommend” it, often leaving home buyers with the impression that they have little choice in the matter.
However, single people without dependents have no need of this protection, which brings £21 billion a year into industry coffers. Most of the 320,000 first-time buyers who bought homes on their own last year will have paid out needlessly for life cover.
Overall about 650,000 single people took out a mortgage last year, according to figures from the Council of Mortgage Lenders. This could indicate that, even on conservative estimates, one in 10 of the 3.2 million policies sold in 1999 was redundant. On this basis, something like £2 billion could be paid out needlessly in premiums each year.
The £607 million spent annually on extended warranties is another area of colossal potential waste, in the view of bodies as diverse as the Association of British Insurers, the Insurance Ombudsman and trading standards officers.
Consumers are encouraged to insure cars and electrical goods, such as washing machines, dishwashers and televisions, with extended warranties by adding a one-off premium to any loan taken out to fund the purchase. Not only are the contracts expensive, but the cost soars further when interest is added over a prolonged period.
As most electrical items come with an automatic one-year guarantee, consumers are paying for something they already enjoy for free. A spokesman for the Office of the Insurance Ombudsman said: “We tell people to think very carefully before buying this insurance, which can last four or five years. They will already have a one-year guarantee.
“If an appliance doesn’t break down in the first year, it will probably be trouble-free for the next few years. You might then start hitting problems after four or five years. In other words, you are paying for cover over the period where you are least likely to need it.”
Another strange animal is travel insurance. Most good-quality home contents policies already insure all your belongings wherever they are. Yet holiday contracts insist on charging you to duplicate this cover by including baggage and personal effects protection.
Direct Line, one of the few travel insurers to provide a policy without automatic baggage cover, says that this cuts the cost of a contract by about 15 per cent. So, overall, consumers could be spending up to £67 million annually on this double indemnity.
Michael Lovegrove, the insurance ombudsman, says: “It is very important that people take out their home contents insurance policies and read them, so they understand what cover they have already bought. It is often possible to add extras for a small additional premium, or no premium at all. But every policy differs, so you need to read them carefully.
“The personal belongings cover you get from your household policy, for example, will normally be better than you would receive from a travel policy, where restrictions and limits are more severe, as are the excesses.”
The good news is that the cost of buildings-and-contents insurance, worth £4.5 billion to the industry, looks set to fall by about a third. The Consumer Bill, due to come before Parliament later this year, promises to put an end to the way mortgage lenders pressure customers into taking expensive home cover. As borrowers are released to shop around, competition should force prices down.
A mobile phone is another item normally included among the personal belongings protection on a contents’ policy, yet many companies bombard users with insurance offers. Roughly one in five of the 24 million phone owners opt for cover costing between £3 and £5 per month. If only half of them are paying unnecessarily, this still shovels £115 million pointlessly into insurers’ pockets.
And so the list goes on. Legal expenses are another area where consumers can end up with double, triple and even quadruple indemnity. Again, most decent household contents contracts provide legal cover, but so do most motor, breakdown and travel policies. But this still doesn’t stop consumers spending a further £99 million on legal expenses insurance, probably without realising they already have protection coming out of their ears.
Similarly, many water companies flood their customers with offers for pipe and sewage cover which can cost up to £84 a year. However, in many cases, the authority is supposed to foot the bill. Where it does not, most buildings insurance policies will. And this could become incredibly big business when you consider that there is a potential market of 10 million households.
Two well-known areas of mis-selling, for which no figures are readily available, are credit insurance and permanent health, or income protection, cover. Banks, finance houses and credit card issuers still use inertia-selling methods to push credit insurance onto customers. Unless you specify otherwise, you can often end up unwittingly paying for cover.
It is true that permanent health insurance can be a valuable means of protecting a family’s income should the main breadwinner be unable to work because of ill health. However, millions of employees already receive this protection as part of their employment.
Stephen Sklaroff, deputy director general of the Association of British Insurers, admits that because of the way insurance has developed, consumers could find themselves paying out twice for similar protection. He said: “Given the wide range of cover now provided by many policies, it is inevitable that some elements will overlap.”
“This is not necessarily the same as duplicate cover, however, because policies differ. It is essential these days that customers continually review their insurance to guarantee they have appropriate protection to meet their needs.”
Mr Lovegrove believes that under-insurance is more of a problem than superfluous cover. He said: “There are, of course, occasions where cover doubles up and people are paying for something they don’t need. But despite that, the real problem in my view is that most people are drastically under-insured. Large numbers have no adequate contents insurance. This is what we should really be worrying about.”
All of which begs the question: why we are squandering a fortune on cover we don’t need, while simultaneously going without essential protection?