Insurance is a very old idea. As far back as 3000BC Chinese merchants spread their shipments among a number of different vessels so as to manage their risk of a loss. Lloyds, the insurance market, has been selling insurance in London since the 1600s, after a group of ship owners met in a coffee shop to discuss sharing the cost of dangerous voyages. Nowadays you can insure everything from your car to your body parts, from your legal expenses to the type of weather that you want on your holiday. But the idea behind insurance is simple. Insurance is taken out when you pay a set amount of money, known as a premium, to an insurance company that in return agrees to cover your costs if a certain pre-determined event occurs. The insurance company is, in effect, taking on your risk.
The finer details of your agreement, such as the exact nature of the risk and the amount that you are insuring against, are contained in what is called a policy document. This document is very important because it sets out in what circumstances your insurer will cover your costs. Needless to say, this often involves a lot of small print, which is why it is sometimes a good idea to get help with your purchase from an IFA or insurance broker. Talking to an independent expert is also essential to ensure you obtain the right insurance cover for you - many people have specialist requirements or circumstances that need a more bespoke policy.
What should I consider when buying insurance?
There are many different types, or classes, of insurance, including motorbike, health, travel, caravan, business, buildings and pet insurance. Bespoke policies are available to cover almost anything and can be arranged through your IFA or insurance broker. This factsheet concentrates in particular on home and contents and motor insurance, although many of the principles discussed will be relevant to other types of insurance.
Home and contents insurance
When insuring your house and its contents you must think about how much your assets are worth. Most people can easily cover their home and contents with a normal insurance policy. If, however, you have higher value goods, such as antiques, art or jewellery, or expensive furniture and fittings, such as designer electrical goods, you may need to consider a mid-net worth or high-net worth policy. Not all insurers sell these policies, which means that you may have to buy them through an IFA or an insurance broker. There are a few questions you should ask when you buy your home and contents insurance.
- Do I own expensive single items? If so it is essential to have them named individually on a policy.
- Are my belongings covered when I take them out of the house?
- Will my home security meet my insurer's minimum requirements?
- Are external goods, such as my garden furniture and the contents of my shed, covered by my policy?
Motor insurance
There are three main types of motor insurance: third party, third-party fire and theft and comprehensive. Third-party insurance is the minimum cover needed to drive legally in Britain. It covers you against claims or costs arising if you cause injury or death, or damage to someone else's property. Comprehensive insurance will cover you for third-party liability, fire and theft and the cost of repairing damage to your car, regardless of whether the accident is your fault or not. The type of insurance you choose and the premium you pay will be influenced by the value of your car and the area in which you live, amongst other factors. If you have driving convictions or penalty points, these will also affect your premium. You can reduce your premium by cultivating a no-claims bonus, which is a cumulative reward that insurers give to policyholders who do not claim on their policies. There are some questions you should ask before deciding which type of insurance you want for your vehicle.
- Will my insurance cover other people to drive my car?
- Will I get a temporary car if mine is in for repair after an accident?
- Does my policy provide breakdown cover?
- Can I get a lower premium if both my spouse and I take out policies with the same insurer?
I haven't made a claim, so why are my premiums going up?
Your premium does not go into a little pot designed to pay only your claims. It is mixed in with all other policyholders' premiums and used to pay everyone's claims. To stay in business, insurers must take in more in premiums than they pay out in claims. This means that if insurers lose money on claims, they must bring in more from premiums. As a result, your premium may increase even if you have not personally made a claim. There are a number of things that push all policyholders' premiums up. The large numbers of uninsured drivers in Britain add pounds to your motor insurance premiums. This is because when an uninsured driver has an accident or causes an injury to another driver or a pedestrian, the money for repairs and compensation is provided by insurers, who pass on the cost to their policyholders. This adds around £33 to your premium every year.
Climate change, also known as global warming, means that the weather hitting Britain is more violent than ever before. This is a particularly big problem for British insurers because, unlike insurers in other countries, they offer comprehensive flood cover as a standard feature in most home and contents policies. Insurers are currently paying out more, and larger, flooding and subsidence claims than they ever have in the past, which is a cost that they must recoup. Our increasingly litigious society is costing insurers heavily. Every time a compensation claim, usually for personal injury, is successful, insurers must not only pay compensation on behalf of their insured, but also the legal fees, which can sometimes be far higher than the compensation itself. This is another expense that insurers will try to recover by increasing their premiums.
Should I shop around before buying insurance?
Insurers set wildly different premiums for what are often similar policies. Some insurers change their premiums on a daily basis or offer special discounts, which is why it makes sense to shop around for a policy and to review your insurance arrangements every year. Experts say that you can cut your motor premium by around £120 and your home and contents cover by more than a third simply by comparing quotes from a number of insurers. An IFA or a broker can help you to find the best premium available, and most importantly, one that is tailored to your needs.
Another good reason to review your insurance every year is because your circumstances and the value of your insured items are likely to have changed. If you do not regularly review the value of your belongings and keep your insurer informed, you will be disappointed when it comes time to claim and your insurer refuses to pay out the amount needed to replace your belongings. About 10 million people are underinsured, which means that they miss out on £30 million a year when their claims are turned down.
Do not forget to tell your insurer about items such as garden furniture, sports equipment and tools, which may be stored outside your house and can be expensive to replace. Likewise, make sure that you tell your motor insurer of any small accident that you have in your car, even if it does not result in a claim immediately, as well as any alterations or modifications that you have had made to your vehicle. If you fail to do so and the other driver subsequently makes a claim, you may not be covered.
By visiting www.unbiased.co.uk consumers and businesses can search for Independent Financial Advisers local to them, and can select ones that specialise in advice on particular areas of general insurance - including buildings and contents, home and leisure, motor, caravan, motorbike, pet, travel, home and leisure, commercial motor and small and large business. Alternatively call 0800 085 3250.
A person authorised and regulated by the Financial Services Authority (FSA) has approved this fact sheet. IFA Promotion takes no responsibility for any action, which an investor takes, based on this information.
The name IFA Promotion® and the Independent Financial Adviser (IFA) logo® are registered trade-marks of IFA Promotion Limited.
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