'Clear case’ for FCA intervention in add-on market

The FCA is proposing a shake-up of the £1bn general insurance add-on market by 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.

FCA director of policy, risk and research Christopher Woolard said the results of a thematic review into the sale of general insurance add-ons found there was a “clear case” for the FCA 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,” he said.

“We believe our proposals will address these issues and prevent consumers paying for poor-value insurance products that they may not need or use.”

The FCA announced its probe into the add-ons market last July and 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.

In its investigation, the FCA reviewed the experiences of more than 1,000 consumers and also looked at product literature, sales, pricing, profitability, and claims. It covered lines including motor legal expenses insurance, personal injury cover, courtesy car cover, key loss cover, extended foreign use cover and no-claims bonus (NCB) protection.

Key findings of the review 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.

The FCA also found that the proportion of the retail price paid out to settle claims, the claims ratio, is lower than average across these markets, indicating that many consumers may be paying for products that are poor value. For example, 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.

FCA recommendations

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; and
• improving the way that add-ons are offered through price comparison websites, including how and when they are introduced.

The industry has until 8 April to respond to the findings.