We have previously reported on the proposed regulation of the general insurance “add- on” market. Most recently in March, the Financial Conduct Authority (FCA) announced plans to ban the opt-out sale of insurance add-ons in financial services markets.
Commonly in the form of a pre-ticked box, an opt-out sale is any sale where the consumer has to override a default setting that pre-selects a purchase for them.
The FCA’s aim is to encourage customers to make active and informed decisions about the add-on products they are purchasing.
The FCA’s director of strategy and competition, Chris Woolard, said that the proposals are “about ensuring consumers can make the right decision on what add-on insurance they do or don’t need. Forgetting to un-tick a box at the end of a purchase is not making an informed decision… the opt-out model means too often consumers are buying a product when they have not been able to give any thought to whether or not they need it.”
The FCA’s proposals follow its General Insurance Add-Ons Market Study conducted in July 2014 which found that the practice of opt-out add-on selling worked against the interest of consumers. The findings showed that in addition to an adverse impact on consumer behaviour and decision- making, the add-on market provides the primary product provider with a sale advantage that can restrict choice, competition and quality for consumers. Add-on buyers are less likely to shop around, are less price-sensitive and often have poor awareness of the add-on products they have purchased, with 19% unaware that they owned them at all. The findings also showed that add-on providers have a clear point of sale competitive advantage in comparison with standalone providers for the same products which puts little pressure on firms to offer good value.
In its report the FCA was concerned that the weaknesses in the current rules have led to consumers buying unsuitable products and getting poor value for their money. They estimated the overpayment by consumers to be around GBP 108 million to GBP 200 million per year.
Another point of focus for the FCA is the lack of information about insurance add-ons provided to consumers to enable them to carefully consider all of the available options and to make good choices according to their individual needs.
“Improvements to the consumer journey might therefore include consumers being offered optional add-ons early in the journey, receive the actual price and/or better product information” said the FCA.
To supplement the ban on insurance add-ons the FCA plans to implement rules and guidance aimed at improving the provision of product information to consumers particularly when they are shopping through Price Comparison Websites (PCWs). PCWs and add on providers generally will be encouraged to provide consumers with more accurate and timely information to enable them to identify the best package according to their needs.
The FCA also plans to require firms to publish claims ratios to illuminate low value products. Transparency will increase the pressure on firms to provide consumers with value for money when purchasing these products.
The FCA said “we consider that the claims ratio – which is broadly the amount paid out in claims as a percentage of what is received in retail premiums and insurance premium tax (IPT) – is a useful measure of the value of insurance products… We therefore propose to require firms to publish claims ratios. We see this as a sunlight remedy, shining light on low value products.”
Under the FCA’s plans, there will also be a deferred opt-in period to Guaranteed Asset Protection (GAP) sales. The FCA plans to “break the point of sale advantage enjoyed by those selling add-on GAP by mandating that the sale cannot be concluded at the point of sale of the car or car finance but only at a later point, and that the consumer must be given information about alternatives if the product is offered at the point of sale at all.”
The FCA is currently carrying out a consultation period which is due to end on 25 June 2015 and intends to release a statement containing feedback and the finalised rules and guidance in the second half of 2015.