[Insurance] The FCA focus on improving competition in the add-on market

Issuing preliminary findings from its general insurance add-on’s market study, the FCA estimates that this now £4bn a year market comes at a cost of £108m to £200m per year to the consumer. Although the FCA recognises that this loss may be returned through lower premium for core products, they note that any reduction is proportionately lower than the additional return recognised by insurers. In fact, some motor insurers are believed to make a third of profits from the sale of add-ons. Such can be evidenced through the review of claims ratios which the FCA found to be poor in the case of add-ons.

Focusing on consumers in the travel, gadget, GAP, home emergency and personal accident add-on insurance markets, the FCA found that in many cases add-on products were mis-sold or incorrectly bundled with the main product. It was found that 40% of people had not planned to buy cover before purchase and 20% couldn’t recall buying the cover three months later.  It was also found that 58% of add-on buyers do not shop around and that this is perceived as a point of sale advantage for firms selling these products.

The Financial Conduct Authority’s proposed remedies under new rules, expected to be in force as early as May 2014, include:

• Banning pre-ticked boxes in relation to add-ons;
• Requiring firms to publish claims ratios in order to improve transparency around product value for consumers;
• Imposing a deferred opt-in on add-on sales for guaranteed asset protection insurance; and
• Improving the way add-ons are offered through Price Comparison Websites.

Below we have outlined what firms should do or question in light of this study:

• Ensure they do not use pre-ticked boxes - a practice which we would have expected all firms to have stopped previously, in line with Treating Customer Fairly (TCF) requirements;
• Ensure that customers are aware of the terms of the insurance contract and its exclusions enabling them to make an informed purchase;
• Ensure that the aforementioned is also fulfilled when they sell their products via price comparison websites;
• Monitor and consider claims ratios when designing and reviewing add-on products as this is what the FCA sees as the core value measure;
• Ensure that bundled products do not include add-ons that are of little or no value to the client. Firms should ask themselves “should we” not “could we” when designing bundled products;
• For bundled arrangements consider if the customer is being treated fairly – For example if the client has more than one car and has separate policies that both have roadside assistance included, is this fair?;
• Ask “do my clients/customers need this product.  How would they benefit?”; and
• Ask “what was the driver for the sale of the add-on product”.  If it was the attractive commission as opposed to client/customer needs, the product is likely to be of little value.