FSA disappointed by low standards in critical illness insurance

This is despite stricter rules introduced when the old insurance rulebook was replaced by the Insurance Conduct of Business Sourcebook (ICOBS) in 2008.

In a move towards more principles-based regulation, ICOBS did away with many regulations that had proved unnecessary, but it also introduced detailed selling standards for protection products, such as critical illness and payment protection insurance (PPI), where specific problems had been identified.

In particular, FSA research had shown that consumers did not understand protection policies and that this was due in part at least to the poor explanations they were given during the sales process. The new rules required firms selling these products orally to make sure customers were given enough information to be able to make an informed decision.

The FSA has now carried out a post-implementation review of ICOBS to see what effect these changes have had on firms' behaviour.

The answer is: not much. The regulator carried out a call listening exercise involving 11 firms selling critical illness insurance, including building societies, banks, direct insurers, financial services/advice networks and one comparison website. In all, 234 completed sales calls were analysed. The results, published on 30th June, were disappointing.

"Overall compliance with ICOBS was unacceptable and all firms failed on some or most of our requirements in the majority of their calls," the FSA's report concludes.

Clear explanations about limitations and exclusions to the cover were provided in only 5% of calls analysed. Fifty percent of the calls failed to offer any explanation at all. The rest were unclear or incomplete. Firms also failed to explain that the insurance did not cover all illnesses and 82% failed to explain limitations and thresholds on those illnesses that were covered. 

Just over half of the calls drew the customer's attention to the duty to disclose all material facts to the insurer and the consequences of failing to do so, but 39% did not. Customers were also left in the dark about how the policy would pay out, with 30% of calls failing to explain that payment would be in a lump sum rather than a monthly income and 26% leaving it unclear.

The regulator found no real difference in selling standards between policies sold directly or via an intermediary, or between cover sold as an add-on to life term assurance or as a standalone product.

"It is particularly worrying that we have stressed the importance of firms explaining to customers the significant limitations or exclusions of a product on several occasions, including at the introduction of ICOBS; however no firms whose calls we listened to met our requirements in this area," the report concludes.

"We intended to test how effective oral disclosure is in improving consumer understanding of protection products […] However, the disappointing and unexpected lack of compliance in surveyed firms in our call listening sample has meant this objective has not been achievable," it said.

"We will look carefully to see whether it is necessary to change the requirements on firms who sell pure protection to mitigate the problems found by our consumer research […] The complexity of protection products means it is vital that firms provide high quality explanations to the consumers who buy their policies," said the report.

Among the options being considered is raising professional requirements. As part of its Retail Distribution Review the FSA is already consulting on how higher qualifications might be applied to those selling pure protection products (life term, critical illness and income protection insurance).

Other findings

In other respects, the more principles-based approach embodied in ICOBS has not radically changed the way firms do things. Despite the removal of the requirement to provide customers with a pre-sale policy summary, for instance, most firms continue to find it the most appropriate way of providing policy information.

ICOBS also removed a requirement for insurers to disclose their status (including whether the sale was advised or non-advised) when selling non-protection policies directly to customers. Intermediaries said this created an unlevel playing field as they were still required to provide status information. Another concern was that customers might be left confused as to whether an insurer was offering its own products or those of other firms.

The FSA's limited survey, however, suggested insurers have not made significant changes to their status disclosure as a result of the change.

The regulator is also not proposing to make any changes to the product information rules, although it still has some concerns about comparison websites. The FSA is hoping the ABI's good practice guide to online selling published last December will improve standards.