Add-on insurance: the next PPI?

As one major insurance broker is slapped with a massive mis-selling fine, we look at add-on insurance policies and whether they may be the next PPI.

Swinton Group-- one of the biggest sellers of insurance on Britain's high streets -- has been fined £7.38 million for mis-selling monthly add-on insurance policies. The broker has set aside £11.2 million to repay customers that were mis-sold unsuitable policies.

Between April 2010 and April 2012, Swinton sold personal accident, home emergency and motor breakdown policies that generated income of £92.9 million for the group. Unfortunately, many add-on policies were mis-sold.

'EVERY sale could have been a mis-sale'

The financial watchdog harshly criticised Swinton for failing to give adequate information to customers and not properly monitoring sales calls.

Swinton did not explain the cover clearly enough, nor did it tell customers that these monthly policies were optional and separate from other core insurance products (such as home insurance and car insurance). The broker failed to give sufficient information about the terms of policies, including their conditions and limitations, and cancellation processes. The nature of the failings, particularly poor sales scripts, meant that every sale could have been a mis-sale.

In addition, Swinton’s monitoring of sales calls for these add-on policies was extremely limited, both in scope and nature. There were no effective checks to ensure customers had been provided with adequate and balanced information, and that the sale was fair.

Could you be owed compensation?

So, what can you do if you believe that you were a victim of (in the FCA's own words) "an aggressive sales strategy at the expense of customers"?

Between July and September 2012, Swinton contacted over 650,000 customers that it believes may have been affected by this gross mis-selling scheme. This has lead to £1.9 million already paid out to policyholders. However, given the size and scale of this scandal, many more customers may be eligible to claim compensation from the broker.

The FCA recommends that any policyholders who believe that they bought monthly cover as a result of mis-selling should contact Swinton directly for advice on claiming compensation. Although the FCA's ruling covers policies sold from April 2010 to April 2012, it's highly likely that this mis-selling scandal ran for much longer than these two years.

Although you may receive compensation for mis-sold add-on policies, you won't get a refund of the original policy (such as home buildings and contents or car insurance). If Swinton agrees that it mis-sold your add-on policy, it will refund all your monthly premiums, plus interest at a statutory rate.

For the record, current compensation claims are averaging around £55 a time -- not a bad return for what might turn out to be a single telephone call.

Three protection rackets

The FCA has highlighted three add-on policies that Swinton mis-sold: personal accident, home emergency and motor breakdown plans. Then again, Swinton sells a wide range of add-on protection policies, so any of its products might have been widely mis-sold.

Here's a quick review of each policy:

1. Personal accident (PA) insurance

Personal accident cover is a poor-value product that doesn't appear expensive only because its monthly premiums are so low (typically £5 to £10 a month). Sadly, PA cover is nothing more than a gimmick, because it pays out only under very narrow conditions.

For example, to get a payout of say, £10,000, you might need to lose a foot, hand or eye -- but only in an accident. The claims ratio (the amount paid out versus the premiums collected) on these policies is around 10% to 20%, making it extremely poor value for money, similar to the dreaded PPI (payment protection insurance).

2. Home emergency cover

This is another low-value, low-premium form of protection that is highly profitable for sellers and, therefore, poor value for buyers. These insurance policies or service plans protect homeowners against boiler breakdown, central-heating failure, blocked drains, burst pipes and electrical faults.

Typically costing from £5 to £25 a month, these policies have been widely mis-sold by numerous firms.

3. Motor breakdown cover

Of the three policies, this is probably the most useful -- especially when your car has broken down in the rain in a far-flung place. However, millions of us make the mistake of buying this 'roadside recovery' alongside our motor insurance, or from market leaders The AA, Green Flag and the RAC. Why pay upwards of £100 a year for this motoring cover when you can get it for under £40 from leading independent provider AutoAid?

The FCA isn't yet done with poor-value insurance and add-ons. It is undertaking a number of reviews into everyday insurance, including automatic renewals. Also, it has already published the findings of its work looking at motor legal expenses insurance, premium finance and mobile phone insurance, fining one provider of mobile-phone insurance.

Whether these forms of insurance turn out to be the next PPI-style mis-selling scandal, only time will tell. But the regulator is watching.

More on insurance:

Mobile phone insurance almost impossible to claim on

Protect your income for less than £10 a month

'A seagull stole my watch': fraudulent insurance claims exposed

How to claim your PPI compensation

The most successful PPI complaints