Out-Law News 4 min. read

Insurance companies face a ban on selling additional cover via opt out mechanism

Insurance companies will be unable to sell insurance cover to people just because they didn't opt out from it under new plans outlined by the Financial Conduct Authority (FCA).

The regulator has proposed a ban on the use of "pre-ticked boxes" for selling insurance add-ons as one of a number of proposed measures to address competition failings in the market. The proposed remedies are subject to consultation.

Insurance law expert Alexis Roberts of Pinsent Masons, the law firm behind Out-Law.com, said that industry would welcome the fact that the changes sought by the FCA are not more widespread.

In its report, the regulator identified its concern with the way insurance add-ons are sold (69-page / 477KB PDF), and in particular over 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.

The FCA said consumers may be paying as much as £200 million more than they could be when buying such products due to the way they are being sold. It also expressed concern that failings in the sale mechanism and in competition may mean that some consumers may be buying add-on cover they either do not need or which is inappropriate for them.

"We found that the add-on mechanism has a clear impact on consumer behaviour and affects the way they make decisions," it said. "Add-on buyers are less likely to shop around, less effective when they do shop around, and less sensitive to price."

"Our research also shows that when buying add-ons, consumers are often not engaging with the purchase and are buying products without clear intent, and as a result they are more likely to end up with products they do not need or use," the FCA said in its report. "We are clear that weak consumer engagement increases the point of sale advantage enjoyed by firms selling add-ons, and provides an opportunity and an incentive for them to sell products that might not meet consumers’ needs or to charge high mark-ups or both. A lack of competition for add-ons can lead to consumers receiving poor value for money from many add-on products."

The FCA's report was issued after it conducted a study into the insurance add-ons markets for travel, gadget, Guaranteed Asset Protection (GAP), home emergency and personal accident insurance cover.

Under the FCA's plans, insurance providers would be banned from selling GAP cover at the time at which cars or car finance is being sold. GAP products provide consumers with cover over the costs they could incur in replacing stolen or damaged assets.

"We will break the point of sale advantage enjoyed by those selling add-on GAP by mandating that the sale cannot be concluded at the point of sale of the car or car finance but only at a later point, and that the consumer must be given information about alternatives if the product is offered at the point of sale at all," the regulator said.

In addition, the regulator has said it will look to improve the way insurance add-ons are sold via price comparison websites (PCWs). It said consumers should have access to better information to inform their decision making on whether to buy those products. The FCA said it will be working to determine what precise requirements to set around the display of information on insurance add-on products on PCWs in the coming weeks.

Another requirement that the FCA has proposed is to force insurance providers to publish "claims ratios" that will show to consumers what financial benefits they can expect to accrue for every £1 they spend on a particular insurance product.

"We consider that the claims ratio – which is broadly the amount paid out in claims as a percentage of what is received in retail premiums and insurance premium tax (IPT) – is a useful measure of the value of insurance products," the FCA said. "We therefore propose to require firms to publish claims ratios. We see this as a ‘sunlight’ remedy, shining light on low value products."

Comments can be submitted to the FCA on its proposals up until 8 April.

Alexis Roberts of Pinsent Masons said: "Many observers will be relieved that this long awaited report does not herald greater change for on the add-ons market. Divorcing sales of GAP insurance from the point of sale for the car or car finance is a key change, but there will be relief that the same approach has not been taken for other add-on products."

"The proposed remedies in relation to PCWs suggest an ongoing FCA concern around whether there is potential for consumer detriment particularly associated with that distribution channel; doubtless the FCA will develop that further when it reports on its separate thematic review into price comparison sites," he added. "The report also demonstrates the FCA's on-going commitment to using new tools like behavioural economics as a means of analysing financial services markets, as well as well-established tools like claims ratios as an indicator of value to consumers."

Competition law expert Alan Davis of Pinsent Masons added: "This is the first market study of this nature undertaken by the FCA and it is expected that the FCA will undertake similar types of studies in the future. For example, it has recently started another market study in relation to the annuities market."

"At present, one of the FCA's operational objectives is to promote effective competition in the interests of consumers. From 2015, it will have even stronger competition powers to undertake these types of market studies and to make market investigation references to the new Competition and Markets Authority, as well as having concurrent powers to enforce competition law under the Competition Act," Davis said.

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