Applying the "Condition of Average"

The UK insurance industry is currently being pilloried by the press for their increasingly rigid application of the "condition of average" clause, which is applied if you are "knowingly underinsured". This little known clause in almost every insurance contract says that if you underestimate your total sum insured (e.g. at £75,000 rather than £100,000), when you make a claim, you only get paid the proportional amount (e.g. a £10,000 claim results in a £7,500 payment).

The Financial Ombudsman estimates that millions of policyholders have fallen into this trap due the rapidly rising number of high-cost gadgets, plus jewellery values going up as gold and silver prices soar. As a result of increasingly tough markets, claims payouts are under pressure – and clients don’t like it.

Reading this, the thought occurred to me that the same has been happening the other way around for years, indeed decades, with insurance IT. Insurance companies have been seriously underinvesting in IT for a very long time. Many insurers still actively rely on core business systems written decades ago in COBOL, and RPG (both originated in the late 1950s), through the 3GLs and 4GLs of the 1970s-1990s. We know who you are, so don’t deny it!

So, when regulation reforms come along such as is being seen in the UK pensions market, requiring rapid and wholesale changes to IT, many insurers are simply saying they can’t cope. Ros Altmann, the UK government’s pensioners champion, has warned in the press of "draconian charges" being levied to pay for the work.

The press have also jumped on the question of "sneaky fees" involving insurers raising money from clients by increasing charges and introducing new ones. Some insurers are charging between £25 and £35 for anything from straight cancellation through to just changing contact details (something they prescribe as a requirement!).

But you can’t have it both ways. Running efficient and effective IT systems is a standard (and differentiating) cost of doing business in the world of insurance. Taking the full premium, then not providing the full service, is exactly the same as a client underinsuring. If your systems are out of date and you can’t properly service your clients or you are forced to make changes quickly, don’t blame anyone else if you did not previously invest the right amounts, in the right way. The "condition of average" dictates you are "underinsured" so take a hit to your bottom line. Stop expecting clients to pay and design IT architectures that are designed for change. Then invest and do the work.

In the last four weeks I have switched my personal insurances because a provider kept me waiting on the phone too long. I also took the advice of my financial adviser and moved my pension out of a company who clearly has failing customer service because of second rate IT.

When the day of reckoning comes, clients will apply their own "condition of average" and if they find you "underinvested" they will take their money somewhere else – just like I have done.



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