The FCA released its report on the results of its thematic review of the before-the-event Motor Legal Expenses Insurance (MLEI) market on 7 June 2013.1 The general conclusion of the report, that MLEI is a product which “can be useful for consumers”, will come as a relief to insurers. Nonetheless, firms selling MLEI need to review their websites and product literature by the end of the year as the report indicates that the FCA will conduct a further review of the sector in 2014.
The report is also important for all general insurers. Firstly, the FCA is explicit in stating that this review and report show how the FCA will supervise general insurers. Secondly, the FCA’s concerns about MLEI and the action it requires from insurers to remedy these are applicable to other markets, particularly given the FCA’s current focus on add-on products.
The future of insurance supervision
It is clear that the FCA’s review of MLEI is intended to send a message to the wider insurance market. The foreword to the report states explicitly that it “shows what you can expect from the FCA’s approach to general insurance supervision.” In light of this statement, there are several striking aspects to the report and the accompanying review.
- the origins of the report are novel in that the legacy FSA was recommended to carry out a review of the MLEI market by the OFT following its December 2011 report into the Private Motor Insurance market. Given the FCA’s recent focus on building up its competencies around ‘behavioural economics’, Insurers should expect a greater focus from the FCA on how certain markets function for consumers.
- the FCA states explicitly that the starting point for testing whether MLEI delivers value for consumers was to assess the product’s profitability because low loss ratios could indicate that consumers have encountered difficulties in claiming successfully. Motor insurance lines suffer from notoriously high loss ratios, so firms will be concerned that the FCA seems to have concluded that profitability indicates that an insurance product does not provide value to consumers
- while the FCA’s research did not generally uncover problematic remuneration structures for the sale of MLEI, it did uncover specific incidents, one of which led to regulatory action. Firms which are contacted by the FCA about general market reviews – including the claims handling review announced by Martin Wheatley in May2 – should now be very wary given that such reviews may lead to disciplinary action.
Further review in 2014
The FCA will revisit the work in 2014 and insurers selling MLEI should expect ARROWS II visits that year. Firms should start to take action based on the report at the earliest opportunity because those firms involved in the review, i.e. competitors, have already committed to taking action and may launch compliant MLEI products before 2014. In addition, the FCA has made it loud and clear in the report that there will be significant regulatory risks from inaction.
It is not just those firms selling MLEI who should consider taking action. The FCA wants all motor insurance providers to reflect on the review’s findings. The report asks firms to “pay particular attention to what customers are saying about their understanding of MLEI and motor insurance in general.”
Read on for more detail from the report and the FCA’s checklist for motor insurers.
Checklist for firms selling MLEI
The report sets out three specific areas where firms need to focus their attention:
The basis on which MLEI is provided (opt-in/opt-out/inclusive)
The FCA is concerned about the way add-on products are sold and the report indicates that whether MLEI is sold as an opt-in or opt-out product has a dramatic effect on the uptake of the product. The opt-out approach leads to a much higher uptake of the product, with many consumers lacking the confidence needed to remove a product that has already been selected for them by their insurer.
Given the FCA’s concerns, firms need to be able to justify their chosen sales method. They need to show that it addresses consumers’ genuine needs and appropriately balances revenue generation and these needs. A firm’s choice of sales technique might be based, for example, on the results of its own consumer research. Whichever method insurers choose to offer MLEI, even if included in the main policy, they must still address the thorny problem of explaining MLEI to their customers.
Nonetheless, firms should pay particular attention to the report’s thinly veiled warning to those choosing to stick with opt-out sales methods as the FCA has come “to the view that it is hard to see opt-out selling of MLEI as consistent with good consumer protection.” This warning seems to extend to all add-on products sold on an opt-out basis as the report applauds “a number of insurers and intermediaries” who have moved away from opt-out to opt-in sales methods and have extended this approach beyond motor to household products.
The quality of explanation of MLEI at all stages of the customer journey
The persistent theme throughout the report is the difficulty consumers have understanding MLEI. At its most contentious the report states that a “key finding of [the FCA’s] research is that there appears to be little or no relationship between consumers and car insurance providers. This remoteness may be compounded by a general lack of understanding of how both the core motor policy and MLEI work”. Many insurers will rightly resist such a characterisation of their client relationships and the implied criticism. Even the report recognises the challenge insurers face in providing information to their customers given that “consumers’ appetite to receive more information appears very limited.”
Recognising the challenge insurers face the FCA’s key recommendations to insurers are that they should provide consumers with an appropriate amount of information – giving them the option to find out more information about the cover, including the policy itself – and focus on making the explanation of the policy as clear as possible.
Specifically firms should:
- ensure that consumers are clear that cover against the cost of defending claims against them is already included in their main motor policy;
- make it clear that the uninsured loss recovery element of the policy only operates when the policyholder is not at fault for the motor accident;
- make it explicit that uninsured losses are to be recovered from the at-fault driver; and
- give prominence to the Reasonable Prospects of Success Test and explain it early in the sales process.
Given criticism in the report about current practices firms should also:
- reconsider the inclusion of MLEI with other add-on products in bundles;
- be careful with the use of the word ‘essential’ to describe MLEI;
- review all the places where their products are on offer and work with price comparison websites to improve their description;
- avoid using pop-up messages when consumers deselect MLEI designed to dissuade them from doing so;
- give prominence to the elements of cover and major exclusions in their policies; and
- avoid complex or overly contractual and legalistic language in their policies and make them succinct to ensure that consumers can clearly and easily understand what their policy covers. Currently firms are failing to get the balance right.
Extent of cover provided
The response of consumers makes clear that they are most concerned about risks arising from proceedings against them, whether by other drivers (covered by their main policy) or as a result of prosecutions. Thus the FCA is encouraging firms to consider providing cover for motor prosecution defence and legal helplines. It is also concerned that motor prosecution cover is very variable across the market, with some firms excluding cover for drink drive prosecutions and others providing cover even where the policyholder has pleaded guilty. The report encourages firms to consider providing more comprehensive motor prosecution defence cover.