Earlier this year, the Financial Conduct Authority (FCA) identified at least five types of general insurance “add-on” products which it suggested offered poor value for consumers. The FCA recently set out new proposals for the regulation of these products.
A general insurance “add-on” is the sort of policy which might be purchased alongside one of the gadgets on a Christmas gift wish list. For example, at the checkout, insurance might be offered to cover a new iPad.
In this article, we assess the perceived problems with the insurance wrapper to the presents filling some Christmas stockings and what appears to be on the regulator’s “wish list” regarding proposed changes to the general insurance “add-on” market.
What has the FCA identified?
The FCA has two main concerns about “add-on” insurance. The first is about the way in which policies are sold. The FCA believes that “add-ons” have a structural point of sale advantage because policies are usually offered on the purchase of the main product. In fact, the FCA has even likened “add-ons” to chocolate stocking fillers sold at supermarket checkouts. The FCA is concerned that consumers’ ability to assess options for cover is limited by a lack of sufficient information. The FCA has also identified the risk of “pressure selling”.
The second issue concerns the value and quality of the products themselves. The FCA believes the market for “add-ons” is not competitive enough and that a lack of product choice translates into consumers paying too much for policies.
The “Wish List”
The FCA’s first proposal is to prevent the sale online of “add-ons” through the use of “pre-ticked” boxes. This is probably the least contentious of its proposed remedies and one which has received support from the insurance industry.
The FCA has also proposed the introduction of a mandatory “cooling-off” period, during which they would like insurers to send policyholders a summary of key T&Cs, together with information concerning the existence of other products. This proposal should not prove too onerous for most insurers.
However, there is a further suggestion that the FCA might impose a point of sale ban on “add-ons”. This would obviously be very disruptive to current business models for selling “add-ons”. There is vigorous debate about this proposal. Banning such sales could deprive consumers of the benefits of cover which they might not otherwise have considered buying.
One example is guaranteed asset protection (GAP) insurance - not always offered alongside traditional motor insurance - which provides a quantifiable benefit in the form of the difference between the value of the vehicle when written off and the actual price paid for it. One compromise suggested by insurers, which may be more appropriate for GAP insurance and/or online sales, would be to begin the cooling off period from the point of order of the product and its insurance, instead of the FCA’s proposal to start the clock on the point of delivery of the product (when cover usually begins).
The FCA also wishes to tackle price comparison sites (PCS) which it believes sometimes fail to identify the level of cover appropriate for the consumer. The FCA thinks that not only should there be more transparency generally in the “add-on” market, but that PCS should give consumers more detailed information on the T&Cs of policies and the level of protection they might provide.
While general transparency measures have been well- received by the market, the suggested publication of the claims ratio for all general insurance “add-ons” has been less so. The FCA views the claims ratio as an important indicator of a product’s quality and value. As highlighted by the Lloyd’s Market Association in an open letter to the FCA, the claims ratio does not include non-monetary benefits derived from cover. It does not take account of mandatory taxes which insurers have no influence over and which do not count towards their incomes. Finally, and crucially, the claims ratio does not reflect the impact of low claims (in terms of volume and quantum) in helping insurers provide protection for lower levels of premium.
Looking forward, the FCA has promised to set up a series of working groups with industry and other stakeholders to consult on both the nature and the implementation of its “wish list”. The FCA appears to be prepared to listen to views from the market at present which gives insurers who offer “add-ons” the opportunity to potentially craft some of the FCA’s New Year’s resolutions.