Selling insurance policies as an ‘add-on’ to purchasers of other financial services or products such as cars and mobile phones often lead to consumers purchasing poor value and unnecessary products, says one financial watchdog.
While presenting its final report on its general insurance add-ons market study following feedback from insurers, the U.K.’s Financial Conduct Authority (FCA) said that it was planning to impose a requirement on firms to publish the claims ratio, or the proportion of the retail price paid out to settle claims, as a measure of the value of a product.
“The report confirms the FCA's original findings that add-on products are often poor value,” said insurance law expert Katie Tucker of Pinsent Masons, the law firm behind Out-Law.com. “Few respondents disagreed with this view and focused their criticism on the FCA's proposed remedies.”
It is great ammunition for brokers here to beat the drum on the advantages of choosing an independent broker, as clients increasingly turn to the internet or large banks to bundle their coverage packages.
“The FCA has not yet confirmed how it expects the industry to remedy the market, but it has flagged that it is still minded to impose a requirement on firms to publish claims ratios as a measure of the value of a product,” she said. “This approach has faced criticism by insurers for failing to adequately measure value, particularly as insurers use different calculations methods and the ratio does not adequately cover all costs.”
The FCA's first market study was designed to test whether competition in the markets for add-on insurance products was effective or not and, if not, to understand why this might be so. It reviewed the experiences of more than 1,000 consumers who purchased add-on travel, gadget, guaranteed asset protection (GAP), home emergency and personal accident insurance cover.
GAP products provide consumers with cover over the costs they could incur when replacing stolen or damaged assets. (continued.)
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In its provisional report published in March, it found that some consumers were paying as much as $367 million more than they could be when buying add-on products, and that failings in the sale mechanism and in competition could mean that some consumers could be buying cover that they did not need or which was inappropriate for them.
The FCA's provisional report included a number of potential remedies for the U.K. market:
- a new requirement that customers be asked to confirm that they want GAP insurance purchased as an add-on in the days following the sale of the primary product;
- a ban on pre-ticked boxes to ensure customers actually choose to purchase an add-on;
- improving the way that add-ons are sold through price comparison websites (PCWs); and
- requiring firms to publish claims ratios.
It found that the claims ratio for add-on insurance products was lower than for traditionally sold products.
