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Insurance policies that pay out - and ones that don't

Neil Faulkner
by Lovemoney Staff Neil Faulkner on 06 January 2010  |  Comments 22 comments

Which types of insurance are worth getting, and which are rip-offs? Neil Faulkner investigates ten different types of insurance policies to find out.

Most of the time organisations are happy to give us journalists information, providing we credit them. On occasions, though, information is unreliable or hidden, leaving us with the daunting task of using our brains. Still, this gives us something to do whilst we wait for the story of the century to call us on the phone using a codename, leading to the inevitable fall of a president.

Today is one of those days where I've been forced to pass the time by thinking. I'm looking at which insurances are cost-effective. Some insurances are unbelievably poor value, so no one rushes to give us data on this. Even so, I've done my best to piece information together.

Below are ten insurance categories ranked by value for money. To order them, I'm using (or extrapolating) what's called the 'claims ratio'. This figure tells us how much of the money we pay in premiums is paid out in claims.

Insurance league table

Rank

Insurance

Claims ratio

1

Life

160%

2

Private motor

84%

3

Accident & health

70%

4

Travel insurance not bought through travel operators

67%

5

Income protection & other

57%

6

Property

55%

7

Mobile phone insurance bought through your network

47%

8

Financial loss

41%

9

Travel insurance bought through travel operators

40%

10

PPI

19%

1. A clear winner

What does 160% mean for life insurance? It means that for every £1 you pay in premiums, insurers are paying out £1.60 in claims. You read that correctly!

Life insurance is currently too cheap. Insurers will have been boosted by the returns of the stock market last year. (It's typically by investing our premiums that life insurers make a profit.) However, we can't expect insurers to keep prices where they are. It's better not to wait if you need it now, because you can lock in the price for 20 years or more. You can compare quotes here.

2. Surprise!

Private motor insurance is a great way in for insurers to sell you other insurances. For this reason, it doesn't have to be so profitable. Hence, for every £1 private vehicle owners pay in premiums, we get back 84p in claims. You many not believe it, but car insurance is therefore great value for money.

3. Good health!

Next is health insurance and personal accident insurance (The former gives you private medical care and the latter pays you for specific injuries, e.g. if you lose a limb you might get £10,000.) I find it unlikely that accident insurance is good value unless it's being given away free, which it often is, but health insurance has consistently been good value for some time - provided you feel that your health insurer should be paying their doctors those huge sums of money!

Those were the top three. Here's a summary of the rest:

Do it yourself

Buying stand-alone travel insurance (i.e. not through a travel agent) gives you a reasonable price: for every £1 in premiums, 67p is paid out in claims. However, I've done a few comparisons of my own to estimate a best-case claims ratio for insurances sold by travel agents. I've extrapolated and, where I've lacked precise data, I've erred on the generous side for agents. Even so, I've come to the very poor ratio of 40% for agent-sold travel insurance, putting it in ninth place on my table.

So don't buy insurance from travel agents. Compare quotes for stand-alone travel insurance instead.

Keep the money coming!

Income protection and other insurances is a vague category, with the data from the Association of British Insurers (ABI). I'm sure some over-priced insurances are lumped in with better quality ones in order to come up with a reasonableish sounding ratio of 57%.

I believe that income protection insurance itself is well priced. If we could strip out the 'other insurances' it would be higher on our table. Don't overlook it.

Stuff

Property insurance covers not just buildings and contents, but other insurances that protect 'stuff' from damage. This makes the 55% figure a little difficult to rely on for homeowners. However, figures from previous years have shown that household insurers pay out around 55p per £1 on average, and the claims ratio just never seems to change, so we know we're not getting an amazing deal on household cover.

One things for sure: the ratio will be a lot worse than 55% if you buy buildings or contents insurance from your mortgage lender or bank, and it will be a lot better if you buy it separately.

Mobile phone insurance

The claims ratio for mobile phone insurance is poor. I've had to extrapolate again for this one but, even being generous to the operators, I find that the best claims ratio I can give is 47%. So for every £1 we pay, the insurers pay us just 47p back.

The dregs

Financial loss is another catch-all category from the ABI. This time, it appears to lump in some dreadfully over-priced insurances with merely hugely over-priced ones. This category includes such things as payment-protection insurance (PPI), legal expenses and mortgage-indemnity insurance. Having worked in the insurance industry in a variety of roles, I reckon that legal expenses helps to pull up the average to 41%. Now which font is best to represent sarcasm when I write: 'Wow'?

Our favourite worst insurance!

I've managed to find a separate figure for PPI. This is good, because I can use it as an example of why the ABI lumps it together with other insurances, and which gives you an indication of how hard it's been to uncover some of these figures!

PPI has a staggeringly bad ratio of 19%. This means that when you protect your loans, mortgages and credit-card payments we get back just 19p in claims for each £1 we pay in premiums. For secured loans, the claims ratio falls to just 10%.

Finally: these figures are averages. You can greatly improve our personal claims ratios by shopping around.

Compare quotes for car insurance, travel insurance, life insurance and home insurance, via lovemoney.com.

Get help from lovemoney.com

If you need a bit of help with insurance, we can help.

First, adopt this goal: Slash your insurance costs

Next, wander over to Q&A and ask other lovemoney.com members for hints and tips about what worked best for them,

Save a lot of money by comparing car insurance through lovemoney.com

More: Life insurance now even cheaper | 305 compelling reasons to compare car insurance

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Comments (22)

  • and1602
    Love rating 0
    and1602 said

    I used to work in a company that was once the largest PPI Insurer in the UK. It is a little known fact that PPI Insurers make very little money. The reason the Claims Ratio is soooo low compared to the Premium is that around 80% of the Premium you pay goes straight to the company that sold it to you - yes that's right SALES COMMISSION. So everytime you buy PPI for your Mortgage remember 80% of the premium is going to YOUR BANK. Everytime you pay PPI for a purchase on credit for things like a TV or Washing Machine you are paying 80% to the Store you are buying from. It is also the case that the larger Banks force unfair PROFIT SHARE schemes on the Insurance Companies. Most Insurers make ZERO profit from Underwriting of PPI - they are forced to make a profit on the cost of Administration...which means they are forced into cutting on customer service to make a buck. Don't blame the Insurance Companies on this one - blame the Banks and Stores...

    Report on 12 January 2010  |  Love thisLove  0 loves
  • The Bank Manager
    Love rating 48
    The Bank Manager said

    Adviser 1 I'm entitled to my opinion and that stands as being that Term Assurance is wasted money.

    Instead, I have Whole Life cover that costs me a just a little more than £20 per month and incorporates an investment element. My family will get a substantial lump sum upon my demise - may that be in 80+ years!

    That's how I've covered my position.

    Yes I am clever in this regard, as I make every intention of being around when I'm mortgage free (not long to go now) and my family will still be in the position that should I die, they'll be financially sound.

    With Term Assurance and no other form of cover, they're stuffed and I'd have failed them.

    The error you appear to have made, is that you seem to consider that I am a qualified insurance sales person. I have never expressed that in my comment and to allow you to be informed, I am not!

    I do however know that one element of insurance alone is insufficient and it is a neccessity that both you and all people with dependents, ensure they insure accordingly.

    My recommendation is to speak to an IFA to ensure all bases are covered. I DID!

    Report on 02 February 2010  |  Love thisLove  0 loves

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