FCA confirms insurance add-on products are often poor value for consumers

Out-Law News | 29 Jul 2014 | 3:41 pm | 3 min. read

Selling insurance policies as an "add-on" to purchasers of other financial services or products such as cars and mobile phones often lead to consumers purchasing poor value, unnecessary products, the financial services watchdog has confirmed.

Presenting its final report on its general insurance add-ons market study following feedback from insurers, the Financial Conduct Authority (FCA) said that it was planning to impose a requirement on firms to publish the claims ratio, or the proportion of the retail price paid out to settle claims, as a measure of the value of a product. It intends to publish a full suite of remedies for consultation later this year.

"The report confirms the FCA's original findings that add-on products are often poor value," said insurance law expert Katie Tucker of Pinsent Masons, the law firm behind Out-Law.com. "Few respondents disagreed with this view and focused their criticism on the FCA's proposed remedies."

"The FCA has not yet confirmed how it expects the industry to remedy the market, but it has flagged that it is still minded to impose a requirement on firms to publish claims ratios as a measure of the value of a product. This approach has faced criticism by insurers for failing to adequately measure value, particularly as insurers use different calculations methods and the ratio does not adequately cover all costs," she said.

The FCA's first market study was designed to test whether competition in the markets for add-on insurance products was effective or not and, if not, to understand why this might be so. It reviewed the experiences of more than 1,000 consumers who purchased add-on travel, gadget, guaranteed asset protection (GAP), home emergency and personal accident insurance cover. GAP products provide consumers with cover over the costs they could incur when replacing stolen or damaged assets.

In its provisional report, published in March, the FCA identified its concerns with both the way in which insurance add-ons are sold and with the advantage businesses that sell insurance cover to consumers can accrue over rivals in selling additional products to those customers at the point of sale. It found that some consumers were paying as much as £200 million more than they could be when buying add-on products, and that failings in the sale mechanism and in competition could mean that some consumers could be buying cover that they did not need or which was inappropriate for them.

The FCA's provisional report included a number of potential remedies: a new requirement that customers be asked to confirm that they want GAP insurance purchased as an add-on in the days following the sale of the primary product; a ban on pre-ticked boxes to ensure customers actually choose to purchase an add-on; improving the way that add-ons are sold through price comparison websites (PCWs); and requiring firms to publish claims ratios. It found that the claims ratio for add-on insurance products was lower than for traditionally sold products.

According to the FCA, 65 individuals and organisations including regulated firms, trade bodies and a consumer group responded to it provisional report. The majority of these were supportive of or did not comment on its high-level findings, and instead focused on the proposed remedies. Particular concerns were raised over what was described as the regulator's "one size fits all approach to remedy design" and the broad scope for some of its proposals. They were "largely critical" of the claims ratio proposal, and questioned whether the GAP break period would deliver the FCA's stated objectives.

Competition law expert Alan Davis of Pinsent Masons said that the report was of particular interest to the financial services sector given that it was the FCA's first competition market study carried out as part of its competition objective under the 2012 Financial Services Act.

"At present, one of the FCA's operational objectives is to promote effective competition in the interests of consumers and the FCA has stated that market studies will be the primary tool it will use for assessing competition issues in the markets that it regulates," he said.

"However, from April 2015, it will have even wider and stronger competition powers, including concurrent powers to enforce competition law under the 1998 Competition Act in all markets related to financial services, not just those markets that it regulates. This means it will be able to refer markets to the Competition and Markets Authority for detailed market investigations and it will also be able to impose penalties for breaches of competition law," he said.