Millions of us are turning to ‘self-insurance’ to reduce outgoings in the cost-of-living crisis.
Instead of paying premiums for certain types of cover – typically breakdown, pet and dental – money is put aside each month to build up funds to cover any incident costs.
One in ten insurance-holders have cancelled cover this year to save for increased living expenses. A similar number have kept policies but reduced cover, consumer champion Which? found.
It shows that concerns expressed by the Financial Conduct Authority this autumn have already become a reality. The watchdog said consumers may cut back on cover due to rising bills and asked insurers to protect customers from unnecessary add-ons and unfair penalties.
Just over half of those who pay breakdown premiums have claimed in the last decade
British consumers are cancelling their insurance plans as the cost of living rises elsewhere
There is huge potential value in protection. Without cover, you’re making a bet you might not be able to afford to lose.
Your house is very unlikely to burn to the ground – but if it happened, the cost of rebuilding and replacing the building and possessions could spiral into hundreds of thousands of pounds.
However, for other types of insurance, increasing numbers of Britons, through choice or necessity, are deciding to self-insure.
To do it properly, regular deposits are made into a savings account and the funds used to pay for incidents you would otherwise have claimed for.
Which? calculated when the tactic can save money and when it’s a risky false economy.
Sam Richardson, deputy editor of Which? Money, said: ‘We’re warning against dropping insurance without a back-up plan. You need to carefully weigh up the risk of leaving yourself without enough in the bank if something goes wrong.
‘You must ensure you have enough saved for worst-case scenarios.’
Each scenario below sees the person pay the equivalent of their usual premium into savings for ten years, while suffering either minor or serious incidents.
Savings interest and inflation are disregarded to ensure a fair comparison.
Consumer champion Which? warns consumers against dropping plans without a back up
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BREAKDOWN INSURANCE
Our driver deposits £96 into savings each year for ten years – the standard cost of a roadside assistance plus home breakdown policy.
His car is quite reliable but he needs to call breakdown services three times in the decade, costing £555. He saves £405 by using his £960 savings instead of insurance. If the car is more breakdown-prone and needs five call-outs – luckily none on motorways, which cost more – his bill will be £825, saving £135.
VERDICT: In both scenarios, self-insuring trumps cover.
HOW LIKELY AM I TO MAKE A CLAIM? Some 53 per cent of those who pay breakdown premiums have claimed in the past decade.
PET INSURANCE
A dog-owner pays £408 annually into a savings pot, equal to the average dog-insurance premium. The healthy pet needs only three straightforward vet treatments over ten years, costing £1,913. The owner saves £2,167 using £4,080 of savings rather than insurance – and avoids losing a further £300 due to insurance excess rules.
But just one serious claim can wipe out self-insurance savings. In addition to the two vet visits, if the pet also needs a hip replacement, costing £9,000, the savings are more than £6,000 short.
Even insurance would pay only £3,920 towards this after caps, excesses and co-payments towards vet costs. But the owner would still be £880 better off with insurance than self-insuring.
VERDICT: The best option depends on the severity of claims.
HOW LIKELY AM I TO MAKE A CLAIM? Eight out of ten owners with insurance make a claim over ten years.
DENTAL INSURANCE
The patient transfers £225 a year – the typical cost of insurance cover – into a savings pot.
Over ten years, they have a low level of dental work: annual check-ups, two cleans, one filling, one crown and one emergency surgery. Overall, this would have cost the patient approximately £1,735, saving £515 off the cost of cover.
In the high-cost scenario, the patient needs a treatment every year in addition to annual checks, totting up to £3,385. Insurance limitations – which often cover only 50 per cent of treatments – mean the insurer will pay out £2,167 and the patient saves £83 using their £2,250 savings instead of insurance.
VERDICT: Self-insurance wins in both scenarios.
HOW LIKELY AM I TO MAKE A CLAIM? Half of insurance-holders make a claim at least once every ten years.
