The Financial Conduct Authority (FCA) has announced it is refocusing its market study into insurance ‘add-on’ products. The refocused market study will centre on the effectiveness of competition in the market for insurance add-on products, consistent with the FCA’s new competition objective. Issues around customer behaviour, profitability and value for money will be at the centre of the FCA’s review. Interested parties are requested to provide evidence by 10 September.


The insurance ‘add-on’ market study is the first to be undertaken by the FCA. The FCA has recently announced market studies will be the primary means of pursuing its new competition objective, employing its wide-ranging powers to collect information and address concerns.

Theories of harm

The FCA has set out its initial thinking on the ‘theories of harm’ it is exploring – that is, its understanding of the means by which the market may not be working well. Based on an overall theory that consumer behaviour when purchasing add-on products, and firms’ reaction to that behaviour, may be producing poor outcomes, the specific issues it is seeking to explore are:

  • the nature of the add-on sale may inhibit a consumer’s desire to shop around;
  • the sale may be based on consumer concerns that have increased during the sale process – for example, if the consumer has just purchased a valuable item and as a consequence has a heightened perception of risk, which creates a desire to purchase insurance cover; and
  • consumers may consider the price of an add-on product against the price of the primary product, rather than against the price of relevant alternatives.

The FCA will also look at barriers to switching by customers and barriers to entry by new market participants (although it states that it currently believes that problems are more likely to arise because of customer behaviour than because of any problems with the structure of the market).

Potential sources of harm

The FCA indicates it is considering a number of sources of potential harm to consumers including:

  • prices may be excessive. As part of this, it will be looking at the profitability of the products – as is common in market studies and investigations undertaken by the general competition regulators, the Office of Fair Trading and Competition Commission.

There is a weighty body of practice on how profitability can and should be assessed, and the circumstances in which profits may be found to be excessive. The FCA can be expected to draw on that body of work in its assessment, and firms under scrutiny will want to make sure that they understand it;

  • quality (eg of cover) may not be what consumers expect. In this context, • the FCA indicates it will be looking at information on claims rates, payouts, claims rejections and complaints; and
  • whether standalone sales offer better value or quality.

The FCA makes clear it is not investigating misselling or other forms of misconduct: rather it is seeking to assess, in line with its new competition objective, whether the market is working well. It also indicates it is aware consumers may value the convenience of purchasing these products at the same time as purchasing the core insurance product, and it will reflect on this in its assessment.

FCA market studies

Market studies are a new tool for the FCA. By contrast with thematic reviews or other FCA information-gathering exercises, they are intended to take a deeper look at how markets operate – much like the market studies carried out by the Office of Fair Trading and market investigations carried out by the Competition Commission.

In its recent guidance on how it will pursue its objectives (including, in particular, its competition objective) the FCA explained that it will use its full range of information‑gathering tools – including its powers of compulsion if necessary – to gather information in market studies.

It also indicated it would be prepared to use its full range of powers to remedy concerns that a market study raises. These could include both behavioural and even structural (eg forced divestment) measures. At this stage of the insurance add-ons market study, it is too early to tell what tools it may find appropriate to address any concerns it raises, although the announcement on the market study notes it could change the rules applicable to the sale of insurance add-on products if necessary. Any such steps would be subject to further consultation when proposed.

Next steps

The FCA has asked firms, consumers and others to provide evidence on whether competition is working well, with a deadline of 10 September.

It is certain that consumer interests will be weightily represented in the evidence the FCA gathers in this new phase, and firms will also want to ensure their voices are appropriately taken into account.

The evidence it is gathering now will supplement the evidence it has already gathered in questionnaires to underwriters and distributors – so firms that have already contributed may well wish to supplement existing submissions.

The FCA indicates it will be conducting consumer research (into product awareness, shopping-around behaviour and awareness of product limitations), looking in particular into whether there are variations between when a product is purchased on a standalone basis and when it is purchased as an add-on. Consistent with the FCA’s focus on behavioural economics issues (as set out in its January discussion paper on the issue) it will also be conducting behavioural research to advance its understanding.

In this information‑gathering phase, the FCA explains it is focusing on five sample products for data‑gathering from consumers and firms: guaranteed asset protection (GAP) insurance, home emergency, gadget, travel and personal accident. Any conclusions it draws, though, can be expected to range beyond this sample set of products.

Initial findings are expected to be published in early 2014 (unlike Office of Fair Trading market studies and Competition Commission market investigations, there is no statutory time limit). The FCA indicates it will consult on these initial findings and any remedies under consideration at that stage.