FCA publishes market study and proposes banning pre-ticked boxes, requiring that claims ratios are published and preventing GAP cover being sold at point of sale.

On March 11, 2014, the Financial Conduct Authority (FCA) published the results of a market study into general insurance add-ons. ‘Add-ons’ are insurance products that are sold alongside other products such as cars or holidays and might include breakdown cover, travel insurance, personal accident or home emergency cover. The FCA study investigated five markets: travel, gadget, Guaranteed Asset Protection (GAP), home emergency and personal accident. The market study was announced by the FCA in July 2013 following concerns that selling insurance products as add-ons might affect the likelihood of consumers making good purchasing decisions and concerns that restricted competition could lead to high mark ups or low quality products of poor value for money.

The FCA’s findings

The market study has found that:

• add-on products lack transparency in terms of cover and price and the ability to compare packages;
• the add-on product mechanism has an impact on consumer behaviour and decision making – add-on buyers are less likely to shop around and less sensitive to price;
• consumers are not engaging with purchase of add-ons and are buying products without a clear intention to do so and, as a result, are ending up with products that they do not need;
• when surveyed approximately three to four months after the purchase almost 1 in every 5 buyers of an add-on product were not aware that they owned the cover; and
• claims ratios for add-on products are substantially lower than for more mainstream insurance products – for personal accident and GAP insurance the claims ratios were ‘exceptionally low’.

The FCA states in the published results of its market study that ‘in many cases competition is not currently delivering value for money add-on products’. The FCA estimates that consumers are currently overpaying for add-on products by around £108 million to £200 million each year.

What does the FCA propose to tackle the identified problems with add-on products?

The report published by the FCA proposes a number of remedies to improve competition. These remedies focus on improving the way decisions are presented to the customer and ensuring that firms improve the value of their general insurance products, both in terms of add-on cover and stand-alone products.

The remedies proposed by the FCA are:

• a deferred opt-in on add-on sales of GAP. This will mean that the sale of the GAP cover cannot be concluded at the point of sale of the car or car finance. If the product is offered at the point of sale alternatives must be presented to the customer;
• banning pre-ticked boxes for the sale of add-ons;
• requiring firms to publish claims ratios; and
• improving the way add-ons are offered through price comparison websites.

What should firms do next?

The FCA invites comments on their findings by 8 April 2014. Firms which are keen to contribute to the FCA’s decision making on remedies should consider providing comments on the market study findings.

We would encourage insurers to review their current governance arrangements for add-on products (including customer communications and eligibility reviews) and undertake a review of policies against the FCA’s six ‘TCF outcomes’.

View MS14/1: General insurance add-on products, 11 March 2014