The Financial Conduct Authority (FCA) is proposing a shake-up of the £1bn general insurance add-on markets including banning pre-ticked boxes, forcing firms to publish claims ratios and breaking the point of sale advantage for guaranteed asset protection (GAP) insurance, usually offered alongside car sales.
Christopher Woolard, director of policy, risk and research at the FCA, said:
“There’s a clear case for us to intervene. Competition in this market is not working well and many consumers are simply not getting value for money. Firms must start putting consumers first and stop seeing them as pound signs.
“We believe our proposals will address these issues and prevent consumers paying for poor-value insurance products that they may not need or use.”
A general insurance add-on is an insurance product that is sold alongside goods or services (e.g. a car or holiday) or other principal insurance products such as home insurance. Given the perceived problems in the market, the FCA announced a market investigation in July 2013. It found poor competition, low levels of claims and consumers potentially being overcharged by up to £200m each year for products that they may not need or even use.
The FCA analysed detailed evidence about firms and consumers in the travel, gadget, GAP, home emergency, and personal accident add-on insurance markets. The FCA reviewed the experiences of over 1000 consumers and carried out behavioural research to understand if buying decisions are affected by different sales tactics. The FCA also reviewed product literature, sales, pricing, profitability, and claims.
Key findings included:
- a lack of competition and information at point of sale, preventing consumers from making comparisons and informed decisions about products
- 25% of consumers who bought insurance as an “add-on” were not aware that they could buy the product separately elsewhere
- 58% of add-on buyers did not make comparisons with other policies in the market, compared to 22% of buyers of “stand-alone” products
- depending on how information about the “add-on” purchase was presented to consumers, they could be up to four times less likely to shop around than they would for “stand-alone” purchases
- 38% of add-on buyers said they had not planned to buy add-on insurance before the day of purchase
- 69% of add-on purchasers could not accurately remember how much they paid for the product three to four months later, and 19% could not even remember buying it. There were particular concerns about GAP insurance, where the sales process in car showrooms often leaves individuals believing that the only source of the product is the showroom where they are buying the car
The FCA found that the proportion of the retail price that is paid out to settle claims, the claims ratio, is lower than average across these markets and very low in some, indicating that many consumers may be paying for products that are poor value, for example:
- GAP add-on insurance claims ratios from 2008 to 2012 averaged just 10%
- the claims ratio for add-on personal accident insurance was less than 9%
This compared with 64% for personal insurance sold to consumers, including motor and household insurance.
The FCA is proposing a number of remedies to address issues in the market, including:
- 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
The FCA is asking for comments on its report and proposals by 8 April 2014.
The market study into general insurance add-on products is the first of its kind by the FCA. In future, these studies will form the mainstay of how the FCA gathers evidence to assess competition problems, and where it can intervene to promote better outcomes for consumers.
Notes for editors
- To view details of the study, findings, and the FCA’s proposals: General insurance add-ons market study.
- A general insurance add-on is a general insurance product sold alongside, or as an ‘add-on’ to, another product, which is considered to be the ‘primary product’. The primary product alongside which the add-on is sold can be either a financial product such as another insurance product (often home or motor insurance) or a credit card or bank account, or a retail product (such as a holiday, car, phone or similar).
- We estimate that add-on purchases made by UK consumers could total approximately£1bn annually. The total net written premiums for the five products we investigated directly in the current market study was £2.5bn in 2012, of which £500m were sold as add-ons. FCA regulatory returns from underwriters indicate that the sales of all products for which the add-on mechanism is a potential distribution channel were much larger, totalling £4.8bn in 2012 on a net written premium basis. If the proportion of add-on sales for the five products we investigated is on average representative of general insurance add-on markets more broadly, we estimate that annual add-on purchases by UK consumers could be around £1bn in total.
- Guaranteed Asset Protection or GAP insurance is associated with the purchase of cars or car credit and is intended to cover the gap between the insurance pay-out based on value of the car and what a consumer paid for it, for example should the car be written off or stolen.
- On 1 April 2013 the Financial Conduct Authority (FCA) became responsible for the conduct supervision of all regulated financial firms and the prudential supervision of those not supervised by the Prudential Regulation Authority (PRA).
- The FCA has an overarching strategic objective of ensuring the relevant markets function well. To support this it has three operational objectives: to secure an appropriate degree of protection for consumers; to protect and enhance the integrity of the UK financial system; and to promote effective competition in the interests of consumers.
- Find out more information about the FCA.