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FCA general insurance add on study ABI analysis and next steps

The key focus of the Financial Conduct Authority's (FCA) provisional findings of its market study into General Insurance (GI) add-ons is on the competition element of this market.

Whilst the FCA acknowledges that GI has an important role to play in consumers’ lives, the regulator states that over the years it has seen poor outcomes from GI add-on products (such as PPI, identity theft etc).

The FCA states that competition in the add-ons market is not effective, and proposes remedies to tackle this problem.

Below is a summary of key findings from the report. The ABI’s key concerns are:

  • The market study offers generic solutions for the GI add-on market which provides different products to meet differing needs, through different distribution chains. The report acknowledges the different customer experience with travel insurance, but overall the report leaves the impression of a wide gap between the FCA’s theoretical analysis of add-on markets as a group, and differing consumer experience in each individual market.
  • We believe that the FCA should instead have a bespoke regulatory approach for each of the add-on markets.
  • We do not believe that the remedy for ‘opt-in tick boxes’ is now relevant as the majority of the market has changed its approach in this area.
  • The issues raised on some of the add-on products (e.g. GAP) has been an area where the ABI has developed guidance, particularly addressing the issues around point of sale.
  • We welcome the FCA’s focus on Price Comparison Websites and we always recommend that customers should shop around to get the best deal. Furthermore, we are pleased that the FCA recognises the overlap of the Competition Commission’s work in this area, alongside its own thematic review on Comparison Websites, as this will ensure a more co-ordinated approach overall.
  • We disagree with the FCA’s focus on claims ratios as we do not accept that they are an accurate benchmark of customer value. Instead, we intend to urge the FCA to focus on claims frequency and handling as it provides a more relevant measure of value (the FCA itself debates this issue within the report). It is important that we challenge this approach, as it paves the way for a minimalist evaluation of the value of insurance to consumers for all insurance products.
  • We will also raise concerns about the short timescale provided to respond to the proposed remedies.

FCA proposed remedies

  • Imposing a requirement that asks customers who purchase GAP insurance as an add-on to confirm that they want the product in the days following the sale of the primary product.
  • Banning pre-ticked boxes to ensure consumers actively choose to buy an add-on and are clear when and how they are purchasing a product.
  • Requiring firms to publish claims ratios to highlight low-value products, pressuring providers to deliver better value to their customers.
  • Improving the way that add-ons are offered through price comparison websites, including how and when they are introduced.

FCA definition of add-ons

  • An add-on product is an insurance product that is sold to consumers as an add-on to a primary product purchase.
  • A standalone product is a separate insurance contract, independent of any other purchase of another product, policy or service.
  • A deferred add-on product are sales where the insurance product is not sold at the same time as the primary product but is still related to it (i.e. a consumer may contact, or be contacted by their utility provider and sold an insurance product – home emergency).

Why did FCA choose GI add-ons?

  • The FCA state that they chose to focus on GI add-ons due to increasing concerns that consumers were experiencing poor outcomes when buying these products.
  • Within its 2012 Conduct Risk Outlook, the FSA highlighted add-on sales as an emerging risk of harm to consumers.
  • The FSA had stated that ‘it is sometimes the case that there is little profit margin in the primary GI products, so firms supplement their income through add-on sales with a high profit margin, some of which will historically have been included in a standard policy. Firms might therefore incentivise staff to pressure sell or to automatically include the add-on without explaining the cover properly.’
  • The FSA had a history of action involving the mis-selling of add-on products (i.e. PPI, personal accident, and card protection).
  • Total net premium for the five products in this study was £2.5bn in 2012, of which £500m is add-ons – though these numbers are difficult to reconcile with the figures for the five individual markets.

FCA analysis of consumer behaviour

  • The FCA identified three ways in which consumers buying add-ons might be harmed by poor competition – they pay too much, do not buy at all, or buy the wrong thing.
  • The complexity of purchasing add-ons is made worse by the timing of the introduction of the add-on in the sales process (towards the end of the sales process of the primary product).
  • Consumers buying add-ons are less likely to shop around, are less effective when they do shop around and are less sensitive to price. Its research found that 58% of add-on buyers did not consider any other policy when purchasing their add-on policy, compared to 22% of stand-alone buyers.
  • 25% of consumers who purchased add-on insurance were not aware that they could buy the standalone product separately elsewhere.
  • Lower levels of shopping around among add-on buyers suggests that many consumer do not engage with the decision on whether to buy insurance until the point of sale, giving primary product providers a point of sale advantage. ‘Weak consumer engagement’ increase the point of sale advantage for firms selling add-ons and provides incentive to charge high mark-ups.
  • Consumers purchasing add-ons did not engage with the purchase of the product and bought the add-on ‘without clear intent’, therefore ending up with a product they didn’t need. For example, 59% of consumers purchasing GAP insurance had not thought about buying it before the day of their purchase.
  • Consumer understanding of policies and product cover is poor for BOTH add-ons and standalone products.
  • The use of claims ratio is used to illustrate the value of these products – GAP has a claims ratio of 10%, Personal Accident has a claims ratio of 9%.
  • A large majority of consumers did not feel pressured into buying their insurance (both standalone and add-ons). However, for GAP insurance, 15% of GAP add-on buyers reported experiencing a little pressure to buy the product compared to 5% of GAP standalone buyers.
  • The FCA concludes that in many cases, competition is not delivering value for money for add-on products. The FCA estimates that the consumer overpays for add-ons by around £108m-£200m.
  • However, it states that consumers ‘appear to value their insurance cover, and 86% of both add-ons and standalone buyers said that they would purchase it again in the future’. (this is similar to the Competition Commission’s findings of customers valuing their add-on products).

Market analysis

  • Add-on sales provide a clear point of sale advantage.
  • There is recognition that stand-alone products often differ in the level of coverage from add-on products and therefore consumers may not find a like-for-like alternative (except in the case of travel insurance).
  • Claims ratio is used as the primary measure of customer value – ‘the lower the claims ratio, the worse value for money the product provides’.
  • Evidence received indicated that incremental distribution costs for add-on sales tended to be low.
  • Combined operating ratios for insurers were high for both stand-alone and add-on sales – insurers were not earning high profits from the underwriting of the sampled products. Profitability was higher for distributors.
  • Commercial terms between insurers and distributors appeared weighted in favour of distributors.

FCA testing of competition

For competition to function effectively, the FCA believes consumers need to:

  • Have a range of options to choose from that could meet their needs.
  • Be able to access appropriate information at the right time about the options available.
  • Assess the various options and decide whether to buy and if so which option is best for them, taking into account costs and benefits.
  • Act on this assessment by buying from their preferred supplier.

The FCA stated that based on its analysis:

  • Suppliers may be enjoying a point of sale advantage – if there was no competitive pressure the FCA considered that consumers may be paying inflated prices for their add-on product.
  • When the consumer is focused on their primary purchase, they are less likely to shop around and compare value for money for the add-on product.
  • Consumers may value their new primary purchase more once they start the purchasing process, and this can strengthen their desire to protect the ‘new’ purchase from loss or damage by purchasing the add-on product at point of sale.

FCA next steps:

The FCA has asked for the industry’s views on its findings by 8 April. It will then publish its final findings and will consult on remedies before the end of 2014.

However, its remedies for GAP insurance will be introduced on an accelerated timetable.

ABI next steps:

The ABI will set up product specific calls with members to discuss some of the findings in more detail.

The ABI will circulate a draft response and arrange a wider ABI meeting to discuss this response.  

Last updated 01/07/2016