Car and home insurance, legal cover and home emergency cover: the next big financial scandal

The FSA has warned it is going to get tough on over-priced insurance add-ons, putting legal cover in the firing line.

In its business plan for 2012/13, the Financial Services Authority wrote:

“We have identified risks with general insurance products that offer poor value for customers who have little prospect of claiming and deficiencies in sales practices of these products. They are generally sold as an add-on to other products and often represent poor value in that they replicate other existing rights or free services.”

Those two sentences contain a lot of criticisms:

1. Poor value insurance.

2. Little prospect of claiming.

3. Bad sales practices.

4. Do no more for you than existing free services.

No wonder the FSA is promising to crack down: “We are committed in 2012/13 to identify these sales and stop them plus deliver redress where appropriate. We will take action against firms that sell products of poor value and mis-sell the products to their customers.”

Prepare for millions more PPI-esque compensation claims.

What add-ons are we talking about?

Brokers and other intermediaries sell all sorts of extras, including car legal cover, home legal cover, home emergency cover, personal-accident cover, identity-theft insurance, mobile phone insurance, credit-card protection and, as you all know by now, payment-protection insurance. (Read Reclaim thousands after PPI court ruling.)

Probably all of these deserve at least one of the FSA's four criticisms.

Car legal cover

Back when I sold insurance, legal expenses policies were a great way for a broker to make a big, easy profit. The policy cost the broker £1.50, who sold it on to customers for £20. This practice is still rife. Just recently a broker commented that it buys its policies in for 50p and resells them to car insurance customers for £30. I believe one even referred to it as legal “protection”. (Note the sarcastic speech marks.)

There can only be one reason why the insurance is that cheap: because it is low value to the customer. There can be no other reason for it costing mere pence to service.

Consider small claims first. If a car accident was clearly the other person's fault, you should generally expect to get the excess back with or without legal cover. Admittedly this is not always the case if your insurer proves unhelpful or the other party's insurance company tries to be difficult. However, it's still not worth paying £30 every single year for that small extra help in getting your £200 excess back.

Now consider big claims, such as hundreds of thousands in compensation for injury and resulting income loss. Legal cover does nothing special for you in this regard that you couldn't get for free after the accident. Legal cover just offers you a no win, no fee service, and it will only seriously help you if you have good chances of winning in court.

Yet this is the same service you'll get if you approach a personal injury lawyer after an accident, with no insurance – therefore saving yourself the £30 a year.

Home legal cover

Home legal cover offers perhaps more value than car insurance legal cover, but in my experience in the industry many customers expect more out of it than they'll get. A lot of the time you won't be able to use lawyers to actually take a dispute to court, for example. For many claims, your assistance might be limited to a little bit of free advice, which you can usually get in an initial half-hour consultation with a fully-trained lawyer on your high street anyway.

Quite probably, many firms involved in these legal policies use them as a way to rope in customers to their paid-for services – much like with car legal cover.

Home emergency cover

Home emergency cover costs anything from £30 to £150 extra every year, depending on both the level of cover you get and the mark-up. It usually gives you a 24-hour number for emergency repairs, with some of the costs paid for by the insurer.

There are lots of exclusions. The Financial Ombudsman Service has recently been upholding two-thirds of the complaints against home emergency cover insurers.

Over the long run you are likely to save money by not paying these premiums year in, year out, even if you have the odd emergency running into the hundreds of pounds.

If you're worried about what you'll do in an emergency, you'll probably find 24-hour services on the internet – without insurance.

Other add-ons

Identity-theft insurance adds nothing of any real value to your existing protection under law, and the same goes for credit-card protection cover. That's why these insurances are often given away for free.

Personal-accident cover pays out modest amounts under tight circumstances, making it a gimmick compared to better insurances, such as permanent-health insurance and life insurance.

The Insurance Times reports that mobile-phone insurance sold as an add-on is to be targeted by the regulator. Some simple calculations show it's probably massively over-priced. Even the much cheaper cover that you buy from standalone providers is not worth it for most people, and will cost you more in the long run.

Remember, insurance is to protect you against events you can't reasonably afford to pay yourself. Most people could afford to replace their mobiles. Do take precautions against the very real risk of someone wracking up massive bills on your stolen phone though.

My own small print

It can't be denied that these policies might, at least sometimes, provide a service that customers couldn't easily afford themselves, especially if you think you might be higher risk. Plus, some policies, especially those from standalone providers that are not sold as add-ons, will be better value.

But these insurances smell fishy to me. It's good that the FSA is planning to tackle them.

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