What are the biggest inefficiencies in the insurance industry?


3 Answers

Kathryn Wright Profile
Kathryn Wright answered

The two main issues with insurance are:

  • Insurance fraud
  • The way it is sold

What is the inefficiency associated with identifying fraud in the insurance industry?

Thousand of pounds could be saved on the part of honest insurance clients, if it was not for the thousands of people who claim fraudulently - or worse, don't have insurance. They therefore leave open opportunities for businesses who then ask the wary to cover themselves against this eventuality, too. So the inefficiency here is that everyone feels cheated by insurance and, therefore, when people see an opportunity to put in a fraudulent claim,
they make the most of it. The insurance company pays out; then because of
all these false claims, the cycle continues. Just like gambling, many people pay in, one person takes the money.

As there is so much fraud, the insurance companies then need to employ more staff to investigate claims - the end result, of course, being that those buying insurance have to bear that cost, too!

The second inefficiency is that the whole idea of insurance is based entirely on fear: fear of what might happen, fear that you will suddenly have to spend lots of money unexpectedly, even though in many cases the one outlay of money would be cheaper.

In many people's opinion, the whole insurance industry is built on conning people, kind of like paying the lunch-time bullies to stop the pocket money bullies stealing your money - the lesser of two evils. The problem with this is that this holds no true value to people. We are basically paying for a service we don't want to have to, for the sake of an easy life, and to not be conned out of more money should we lose something or have an accident. Thus, there is no true feeling of lasting value in this product.

When does insurance work?
I believe holiday insurance works really well. You pay for the period you want to be covered for and based on current health, where you are going and what activities you'll be doing there. It is not based on:

  • Did you ever claim before?
  • Which airline are you flying with?
  • Which hotel are you staying at?
  • How long have you had a passport for?
Car and house insurance is, as they have to be so guarded against fraudulent claims, that they have to base it on so much more information. 

If this can be revolutionised, I would be very impressed - operating this as another tax might really be the only way of addressing the issue fairly, and without allowing big insurance companies to charge more than necessary. It's crazy now that you can insure your insurance. Oddly, if I don't have an accident for 5 years, I don't get my money back because they didn't need to bail me out or buy me a new phone!

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Kathryn Wright
Kathryn Wright commented
I didn't know that. Maybe that isn't particularly fair either. There must be a better way though! It would prevent fraudulent claims at least as people seem to think they are 'owed one'
Paul Russell
Paul Russell commented
I think it works okay in Ireland actually - the premiums are low enough that most can afford them, and I think there's some state support if you can't.

It wouldn't surprise me if that's where we get to in the UK eventually. I couldn't tolerate a US style system where if you're sick before you take out the insurance, it's tough luck, but I can see a situation where the NHS financing needs to be replaced with a (more expensive) mandatory fee.

Fingers crossed that doesn't happen too soon though.
Kathryn Wright
Kathryn Wright commented
Something has to happen with the Nhs. It's a system from 1945, it can't be sustained how it is for much longer surely!
Yo Kass Profile
Yo Kass answered

As an industry, I'd say there's still too much competitive rivalry. There isn't a huge difference between the the products that different insurance companies offer, so currently the only way one competitor can "outdo" another is by either reducing cost or absorbing loss.

I'm no expert, but I can't imagine diversification is much of an option for most insurance companies, if anything - the threat of new entrants is one that probably looms over most small insurance companies.

What's to stop a commercial or investment bank (or any financial service for that matter) from offering an insurance product?

In the US, something called the Gramm-Leach-Bliley Act regulates this area, and legislation has also facilitated mergers and acquisitions in the sector - but I think there's still some way to go.

Finally, I'd also throw in an over-sensitivity to fluctuating interest rates, although I guess that's an intrinsic inefficiency when dealing with investing capital.

Anil Kumar Profile
Anil Kumar answered
The biggest inefficiency of the insurance industry is their inability to process a claim immediately and help the policyholder or beneficiaries when they need it the most. Usually, when a policyholder meets an unfortunate incident, that is when they need an assistance the most but when they or their beneficiary contacts the insurance company for a claim; that ask for various documents and paperwork and don't process their claim till their satisfied. This is very frustrating and at times makes the situation worse.

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