The Financial Conduct Authority (FCA) has issued its provisional findings of its market study in relation to the add-ons Insurance Market. The study covered travel insurance, the insurance of gadgets, Guaranteed Asset Protection (GAP), home emergency insurance and personal accident insurance. These are all products that are sold alongside, or as “add-ons” to, other products such as holidays, mobile phones, cars or, indeed, other insurance products.
Accordingly to Christopher Woolard, the FCA Director of Policy, Risk and Research, whilst buying insurance as an add-on can be a quick and convenient way for consumers to secure the cover they need, the many instances of poor outcomes from add-ons sold in recent years suggest that these markets do not always work well for consumers.
The FCA’s provisional findings
- Add-on buyers are less likely to shop around, less effective when they do shop around and less sensitive to price.
- In a consumer survey, 58% of add-on buyers said that they did not consider any alternative policies and 25% were not aware that they could buy the product separately elsewhere.
- Add-on buyers were much less likely than stand alone buyers to be able to recall how much they paid for their insurance (69% could not give an accurate estimate of what they paid).
- Add–on buyers were more likely to end up with products they do not need or use.
- Many add-on buyers did not think about buying insurance before they discussed the purchase of the product in question (for GAP, the figure was 59%).
- 19% of add-on buyers were not aware that they owned the product when asked about it three or four months after purchase.
The FCA study also claims that a lack of competition for add-ons can lead to consumers receiving poor value for money – the claims ratios for add-ons are almost always substantially lower than those for mainstream general insurance products. For GAP and personal accident insurance, the claims ratios are exceptionally low.
The FCA’s proposed remedies
The FCA feels that there is a clear case for them to intervene to make competition in the market for add-ons more effective. Their proposed remedies are:
- Mandate that GAP cannot be sold at the point of sale of the car or car finance, but only at a later point, and consumers must be given information about alternatives to the product.
- Ban pre-ticked boxes on forms for the sales of add-ons.
- Require firms to publish claims ratios to demonstrate that products may be low value.
- Improve the way add-ons are offered through price comparison websites.
The FCA are inviting comments on their proposed remedies by 8 April 2014 where further refinement and formal consultation will follow thereafter.
Is there a long running theme here?
This is the first market study from the FCA, but it is following a long running theme that was part of the regulatory programme in respect of the PPI market. The FCA has identified various issues in sales practices, and governance, risk management and compliance controls, which it regards as inadequate, in particular in the context of non-advised face-to-face or telephone sales, which need to be addressed. These include:
- Sales scripts need to reflect fully the applicable regulatory requirements.
- The data derived from script adherence and monitoring must be genuinely revealing of the extent to which customers are treated fairly and that TCF sits at the heart of a firm’s business model.
- If a choice is being offered, it must be a genuinely informed choice.
- A proper explanation must be given as to whether a period of cover is genuinely ‘free’, and how such period can be terminated.
- A firm must be prepared to operate remuneration systems where non-compliant sales do not contribute to incentive schemes, even to the extent that commercially effective, but non-compliant, sales personnel are not rewarded.
How should firms respond?
Firms need to consider whether they wish to continue selling the add-ons in view of the FCA’s proposed remedies and, if they do, ensure compliance with the remedies as finally determined following the proposed consultation.
They should also subject their existing operating systems to stringent scrutiny and audit. If there are adverse findings, firms should consider undertaking:
- One or more forms of Past Business Review (PBR), such as market research on the extent to which customers have truly understood the cover they have bought;
- A Customer Contact and Remediation programme (CCR), and a Root Cause Analysis (RCA) as to why such steps have become necessary.