The FCA is proposing to make dramatic changes to the £1 billion insurance add-ons market in order to protect consumers, according to its market study report released yesterday.

The FCA has found poor competition, low levels of claims and a potential overcharge of customers by up to £200 million each year for products that they may not necessarily need or use. 

Christopher Woolard, Director of Policy, Risk and Research at the FCA, said: "There's a clear case for us to intervene.  Competition in this market is not working well and many consumers are simply not getting value for money.  Firms must start putting consumers first and stop seeing them as pound signs".

As I previously explained, the FCA's market study was launched in July 2013 and is the first of its kind since the FCA became responsible for the promotion of competition in the financial services industry.  

Provisional Findings

The FCA's market study concludes that, in many cases, competition is not currently delivering value for money on add-on products.  The FCA's key provisional findings include the following:

  • A lack of competition and information at the point of sale, preventing customers from making comparisons and informed decisions about products;
  • 25% of consumers who bought insurance as an add-on were not aware that they could buy the product elsewhere;
  • Add-on buyers are less likely to compare add-on products, and if they do, are likely to be less effective and less sensitive to price.  Indeed, 58% of add-on buyers did not make comparisons with other policies in the market, compared to 22% of buyers of 'stand-alone' products;
  • Depending on how add-on information was presented to consumers, they could be up to four times less likely to shop around than they would for 'stand-alone' purchases;
  • Customers are not often engaging when purchasing add-ons and are buying products without clear intent.  Indeed, 38% of add-on buyers said they had not planned to buy add-on insurance before the day of purchase;
  • Customers who bought insurance as an add-on were much less likely to correctly recall how much they paid.  Indeed, 69% of add-on purchasers could not accurately remember how much they paid for the product three to four months later, and 19% could not remember buying it!  There were particular concerns about GAP (guaranteed asset protection) insurance, where the sales process in car showrooms often leaves individuals believing that the only source of the product is the showroom where they are buying the car; and
  • The proportion of the retail price that was paid to settle claims (the claims ratio) was lower than average across the markets, and very low in some, indicating that many consumers may be paying for poor value products.  For example, the GAP add-on insurance claims ratios from 2008 to 2012 averaged just 10%, and the claims ratio of add-on personal accident insurance was less than 9%.  This compares with 64% for personal insurance sold to consumers, including motor and household insurance.

The report will draw comparisons with the Competition Commission's analysis of add-ons in its Private Motor Insurance market investigation.  There, the CC has provisionally found that insufficient information is provided to consumers in the sale of add-ons in private motor insurance, and has criticised the point of sale advantage enjoyed currently by insurers.  It is to be hoped that, following the FCA's provisional conclusions in this area, the CC will now find the FCA better-placed to deal with any issues around insurance add-ons.

Proposed remedies

The FCA is proposing a number of remedies to address the issues found, including banning pre-ticked boxes, making it compulsory for firms to publish claims ratios (to highlight low value products) and "breaking" the point of sale advantage for GAP insurance by proposing that customers confirm in writing that they want GAP insurance in the days after the initial sale of the motor vehicle.  This remedy will be particularly onerous for insurers.  The FCA may be surprised at how a busy consumer may overlook the need to reconfirm their add-on cover to make it effective and as a result may be left without cover.

The FCA has also indicated that it may act to improve the way that price comparison websites offer the provision of add-ons, including what information customers can access and when this information is introduced.

The FCA's focus may now be on distributors rather than insurers as the market study did not find that either add-on or stand-alone insurance policies provided insurers with high profits (which the FCA clearly regards as a good thing) whereas distributors did earn much higher profits from add-on rather than stand-alone products.

What next?

The FCA's proposed remedies will be subject to further refinement, a cost-benefit analysis and a formal consultation process.  Prior to this, the FCA invites comments on its report and proposals by 8 April 2014.  It will publish its final findings "in due course" and has committed to publishing its consultation on remedies before the end of 2014.

According to the FCA's press release, this market study paves the way for future market studies which will become the principal way in which the FCA will gather evidence to assess competition problems.

As Christopher Woolard, in his Foreward to the market study report, explains, the FCA's approach will evolve over time and it will continue to learn lessons.  However, the questions it poses in the add-ons market study about customer behaviour and outcomes are clearly the kinds of questions the FCA will ask in future market studies.