On 11 March 2014 the FCA published MS14-1: General insurance add-ons market study: Provisional findings and proposed remedies.
This was the first OFT-style Market Study carried out by the FCA under its new competition powers, and in pursuit of its new competition objective.
The subject was the sale of General Insurance (GI) ‘add-ons’: insurance products sold alongside – and at the same time as – other retail or financial products. The Market Study looked at five such products: travel, gadget, GAP, home emergency, and personal accident insurance; in each case, comparing the details for add-on sales and stand-alone sales. From this the FCA sought to extrapolate broader conclusions about the add-on sales mechanism and the GI market in general; it also noted that some products fared better (travel) and worse (GAP and personal accident) than others.
The background to the Market Study was the 2012 FSA study into the sale of general insurance add-ons; 2013 FCA Thematic Reviews of motor legal expenses insurance and mobile phone insurance; OFT’s review of extended warranties; and various FSA actions involving the misselling of insurance, including PPI.
The FCA found that competition in the sale of GI add-ons was not effective, and there was a “clear case” for intervention by the regulator.
The main evidence for consumer detriment was the difference in the claims ratios (i.e. the value of claims paid out as a percentage of premiums paid) for similar products, depending on whether they had been sold as add-ons, or stand-alone policies.
The FCA estimated that consumer ‘overpayment’ could be as high as £216m per year.
Research into add-on sales suggested various possible causes for the failure of market forces to keep prices competitive:
- consumers are sometimes not aware that alternatives (either stand-alone, or other add-on bundles) are available, and are more likely to buy the first insurance product they are presented with;
- where consumers are aware of the availability of alternatives, they sometimes struggle to compare products, and calculate the different costs; in particular, consumers often underestimate the annual cost of a policy when only a monthly fee is quoted;
- consumers might also be dissuaded from shopping around by the ‘cognitive’ and ‘action costs’ involved: once they have made the effort of buying a primary product, they do not care to expend the additional mental effort involved in comparing different insurance deals as well;
- the ‘endowment effect’, whereby consumers contemplating a new primary purchase are more inclined to buy insurance to protect it;
- buyers of add-on products tend to have worse understanding of product coverage, and are sometimes even unaware that they own a particular insurance product; both factors make it less likely that consumers will claim under a policy, which in turn drives down the claims ratio figure;
- buyers of add-ons were more likely to be vulnerable to ‘soft’ pressures, including the apparent trustworthiness of salespersons, especially where sales took place face-to-face. (However, consumers in general did not consider that they had been “pressured” into buying.)
The FCA concluded from the above that add-on sellers were often making (sometimes extremely large) profits by taking advantage of consumer behaviour, and the point-of-sale advantage, rather than by improving their products or prices in response to effective market competition. In particular, add-on insurance prices were not constrained by competition from stand-alone insurance products (except travel).
Although the focus had been on the effectiveness of competition, and not on assessing firms’ conduct, the FCA nevertheless uncovered some cases of non-compliance with ICOBS. No evidence of actual misselling was found, although the problems with the add-on sales process identified above could increase the risk of consumers ending up with unsuitable insurance products.
Matters were slightly complicated by consumers’ own declared satisfaction with insurance products (although understanding of policies was often poor), and with the convenience of the add-on sales process.
The FCA did not find evidence of any major barriers to entry in the market.
Beyond the add-on process
Some of the FCA’s findings went beyond the add-on sales process and concerned GI sales more generally:
The FCA considered that even stand-alone GAP and personal accident insurance was often still very poor value for money; it also had wider concerns about how well consumers can assess the value of different insurance products. There was a further concern with poor consumer understanding of policy details.
On the other hand, the FCA is aware that too much information can also be unhelpful to consumers - “disclosure must be smart”.
The FCA proposed the following remedies, which will be the subject of a subsequent consultation:
- A mandatory deferred opt-in for add-on sales of GAP insurance; i.e., a car salesman can offer a GAP policy at the time of selling a car, but cannot conclude the contract there and then; instead, the consumer will need to confirm the policy later on. The FCA intends to introduce this remedy as soon as possible.
- A ban on opt-outs (e.g. pre-ticked boxes) in GI add-on sales processes.
- A requirement for firms to publish claims ratio data. (This relates also to the FCA’s concerns with poor value stand-alone insurance products, described above.)
- Further work on how to improve the presentation of information about add-ons on price comparison websites; this could either involve a “market-led solution” or new FCA rules.
- The FCA will also “continue to consider what other remedies may be appropriate.”
The FCA invited Market Study participants and other interested parties to contribute their views on its preliminary findings and proposed remedies; but these will also be the subject of a formal consultation paper “before the end of the year”.