Make sure you’re not a victim of ‘furry handcuffs’ motor insurance

Why firms should take plenty of time to examine their policies for catches and possible traps

AT a time when most businesses are struggling to pay exorbitant premium increases, it may seem strange to hear an insurance expert warn about the traps for the unwary which may lurk in the small print.

There are many dysfunctional aspects to the insurance market in Ireland.

Let me focus on just two. Having an insurance broker is usually better than not having one. However, some policyholders seem to be making the mistake of thinking that because a broker is involved, the entire insurance market will have been researched to secure the most favourable quotation.

That is not necessarily the case. When a broker says, “This is the only available quote”, it might be wise to clarify whether that is because no other underwriter in the entire market is prepared to take on the business, or is it because the broker is currently only dealing with one underwriter for motor and maybe only one for liability?

Being a bit of a cynic, I would be inclined to demand to know details of the actual proposals put to – and responses from – other underwriters, just to check that the business risk profile was correctly presented to the insurance market.

Brokers receive commissions from underwriters. These earnings are usually based on a percentage of the premium. Therefore, the more the policyholder pays, the more the broker earns, unless you enter a fixed-fee arrangement with all commissions remitted back to the policyholder. However, some brokers also have profit-share arrangements with underwriters.

I am of the personal view that policyholders should be told about such potentially perverse incentives, just to ensure these are not acting as a bias against truly independent advice.

Incidentally, I was surprised at a recent insurance conference to hear some commercial policyholders recount the difficulties they encountered in getting their own claims cost data from their insurers.

It is obviously essential to know the details of claims payments and estimated reserves for outstanding claims on which the premium calculation is based.

One policyholder showed me such a list that was secured, after a lot of hassle, from their insurer.

This included amounts reserved against accidents for which no claims had been made within the statutory time limit of two years, so there was, in reality, no residual liability exposure.

Now to the question of discounts for businesses.

It may seem only fair to be offered a guarantee that next year’s premium will not increase by more than (say) 5pc if the current year’s projected accident costs do not exceed (say) 50pc of the premium paid – and various other permutations of those figures.

By the time you have read down through all the various permutations of limits on increases in premium compared to various levels of loss ratio you may be tempted to say, “Where do I sign?”, before you have read down to the last paragraph of small print. That means you could miss the fact that you are signing up for an onerous LTA?

What is an LTA, I hear you ask?

Oh, did the broker not explain that to you in detail?

I have seen correspondence where a policyholder was sent such a form to sign, and the broker just put the term ‘LTA’ as the heading of the email.

The policyholder says that the ramifications of this term was never explained, as that business found out to their cost the following year when a much better deal was secured elsewhere.

But that was before taking into account the substantial penalty incurred for switching insurers.

The letters LTA stand for ‘long-term agreement’. That leaves the insurer free not to renew but requires the policyholder to pay a percentage of the premium from inception if the cover is not renewed with the previous insurer.

Such ‘furry handcuffs’ can be expensive, so it would be wise is to watch every word in the small print.

Only businesses with an annual turnover of less than €3m are protected by the Central Bank code, so it could be open season for insurers on all other policyholders.

Dorothea has been highly critical of the culture of the insurance industry that increased premium charges by 70pc over three years to 2016. She is probably best known as Chair of the Motor Insurance Advisory Board – a previous statutory investigation into the cost of insurance