Jason Nissé: All pain and don't try making a claim: now that's what I call insurance

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The Independent Online
They say April is the cruellest month – but I think it is July.

They say April is the cruellest month – but I think it is July. My car insurance runs out at the end of June and, though I delay the pain by paying on a credit card, the moment of truth arrives only a couple of weeks later. It never ceases to be a shock. And when I add in home contents, buildings, bicycle, travel and other sundry payments, insurance comes out as the second largest household expense each year after the mortgage.

But what is it worth? The collapse of Independent Insurance has rekindled a belief I have long harboured (but have tried to put to the back of my consciousness), that insurance is for the large part grit that gets in the way of the efficient workings of the financial markets and at its worst is downright theft.

To understand why this is, you must understand how the insurance market works. As few people do, few people can see the through the fog created by the insurance industry.

It goes like this. You purchase insurance, which appears to be available from a bewildering number of sources. Yet when it comes down to it, there are only a dozen or so major insurance companies that have the vast majority of all general insurance business. They trade under a host of different names to put you off the scent, and they change their names with depressing regularity, so you find it hard to know who you are dealing with.

They then "reinsure" the risk. This is like syndicating a loan in the banking market. The insurance policies are all aggregated together in one block and then sold off in pieces to reinsurance groups – such as Munich Re – or investors via the big reinsurance markets, for example at Lloyd's of London or in Bermuda.

Every few years there is a massive scandal in one of these markets which leads to thousands of investors losing money, lots of hand wringing and the odd reform. I once asked a colleague to explain the Lloyd's disaster of the mid-1980s to me. He started talking about LMX spirals and accelerated asbestosis liabilities, so rendering a relatively simple tale of people taking on more liabilities than they could handle into a complex story few had the patience to follow.

Most consumers find insurance bewildering. The contracts are long and legalistic, despite attempts by the Association of British Insurers to simplify and standardise the terms. So most customers either stick with well-known brands (which is difficult because the companies keep merging or changing their names) or shop on price. The understandable view that cheap is good when it comes to insurance is not merely restricted to consumers – businesses are highly price sensitive, which explains the past success of Independent Insurance.

This is fine – unless you want to claim on the policy. Then you often find a large amount must be claimed before the insurer coughs up a bean; this is called (with no hint of irony) an excess. On further investigation, you find all sorts of things.

A friend of mine recently had a shunt in her car. She took it to the garage, where the mechanic told her that the insurance estimate for the repair was £1,500. When she expressed surprise at such a high cost for a relatively small amount of work, she was told that if she wanted to fund this directly, it would cost about £700. The difference, she was told, was that the garage always used brand-new parts from the factory for insurance jobs – when second-hand parts would often do – and also bumped up the labour costs. "They rarely quibble," said the mechanic.

Working out the excess, the loss of no-claims bonus and the other disincentives to making a claim (I was once refused contents insurance because I had made three claims in the previous five years), she realised it was better to take up the mechanic's offer.

After a robbery, many people claim for things they never had. This loading on claims is commonplace. It is dishonest, but it makes you feel you are beating the system. The insurers try to counter this by disallowing many of the things you might, quite legitimately, have claimed for.

This process not only adds to the cost of insurance premiums but also diminishes the worth of insurance. Ultimately you will find that for anything except a particularly large claim, the process is irritating to the point of making it not worth your while.

Does this mean there is no value in buying insurance? Like banking until about 10 years ago, the small guy is often paying for the big guy's risks. However, you are not forced to buy a bank account. You are forced to buy car insurance, buildings insurance (if you have a mortgage) and travel insurance.

This industry has existed in largely the form it is today for three or four centuries. It is either doing something right or desperately needing reform. You know what I think.