Regulator releases final findings into the general insurance sector

The FCA has published its final report into the general insurance add-on markets, confirming that competition is ineffective and not working for consumers.

The regulator released its findings yesterday, following a three-month consultation period after its provisional report was released in March.

It has confirmed that the add-on mechanism has a “clear impact” on consumer behaviour and often affects consumers’ decision-making, that many consumers are getting poor value from add-on products and standalone purchases, and tha there is a lack of transparency and comparability about the value provided by general insurance products.

The FCA received 65 responses to its initial report from regulated firms, trade bodies, a consumer group and individuals.

“While respondents questioned aspects of our methodology, they did not present evidence to suggest that our conclusions were wrong,” the FCA said.

The FCA has proposed remedies to address issues in the market, which it will consult on later this year. These include:

  • 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.

Shore Capital analyst Eamonn Flanagan said this would make for “unpleasant and uncomfortable reading” for many insurers, particularly those personal motor insurers for whom the sale of add-ons and ancillary products account for a consideration proportion of earnings.

In 2013, add-on or ancillary income accounted for 33% of Admiral’s earnings, 24% of Esure’s, and 12% of Direct Line’s.

“It seems that the FCA is now focused on fixing this segment of the insurance world with a series of remedies considered. The latter range from the seemingly mundane, such as the banning of the use of ‎default opt-outs (via pre-ticked boxes), to the more prosaic, such as seeking value measures (e.g. claims ratios),” Flanagan said.

FCA methodology

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.