At long last, the sale of poor-value insurance policies sold alongside cars, holidays, phones and other services is under the microscope.
After decades of abuse by insurance companies and their agents, the UK financial regulator is poised to crack down on the mis-selling of poor-value insurance add-ons. This follows a similar crackdown on payment protection insurance (PPI), a scandal which has cost British banks over £12 billion in compensation to date.
A £1-billion-a-year mis-selling scandal
The Financial Conduct Authority (FCA) has proposed a shake-up of the £1 billion market for what are known as 'general insurance add-ons'.
These poor-value protection policies include the likes of guaranteed asset protection insurance (GAP, sold alongside vehicles), home emergency cover (sold by energy and boiler providers alongside home insurance) and travel insurance not sold by properly-trained and qualified brokers.
The FCA's proposals, aimed at improving competition and consumer protection, include: banning pre-ticked boxes (so-called 'negative option' opt-ins); forcing firms to publish claims ratios; and severing the point-of-sale advantage for insurance policies sold by car dealers.
Christopher Woolard, director of policy, risk and research at the FCA, said: "There’s a clear case for us 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. We believe our proposals will address these issues and prevent consumers paying for poor-value insurance products that they may not need or use."
Poor selling practices exposed
In order to tackle industry-wide problems, the Financial Conduct Authority analysed detailed evidence about firms and customers in a wide range of markets, including:
- travel insurance (holiday cover is notoriously overpriced when bought from travel agents and tour operators);
- gadget insurance (including poor-value protection for mobile phones and tablets);
- GAP cover (sold alongside vehicle finance, this covers the 'financial gap' between your motor insurance settlement and any finance balance due following a write-off);
- home emergency cover (aggressively mis-sold to homeowners and even tenants, for whom it is useless);
- personal accident insurance (sold as an add-on to dozens of insurance policies and other products).
Given the perceived problems in this industry, the FCA announced a market investigation in July 2013. This found poor competition, low levels of claims, and people potentially being overcharged by up to £200 million a year for products that they may not need or ever use.
The FCA reviewed the experiences of over 1,000 people and carried out behavioural research to understand if buying decisions are affected by different sales tactics. The regulator also reviewed product literature, sales, pricing, profitability and claims.
[SPOTLIGHT]The FCA's market investigation uncovered these disturbing drawbacks:
- A lack of competition and information at the point of sale. This prevents customers from making comparisons and informed decisions before buying protection products.
- A quarter (25%) of customers buying insurance as an add-on were unaware that they could purchase the product separately (and certainly far cheaper) elsewhere.
- Almost three-fifths (58%) of add-on buyers did not make comparisons with other policies in the market, versus only around a fifth (22%) of buyers of standalone products
- Depending on how information about add-on purchases was presented to customers, they could be up to four times less likely to shop around than they would for standalone purchases
- Almost two-fifths (38%) of add-on buyers said they had not planned to buy these extras before the day of purchase.
- Nearly seven in ten add-on purchasers (69%) could not accurately remember how much they paid for the product three to four months later, while almost a fifth (19%) could not even remember buying it.
- There were particular concerns about GAP insurance, where the sales process in car showrooms misleads individuals into believing that the only source of such policies is from the showroom itself.
High premiums, but low claims
The FCA is also greatly concerned about rip-off pricing for these add-on insurance policies.
The regulator found that the proportion of the retail price that is paid out to settle claims (known as the claims ratio) is far lower than average across these markets, and incredibly low in some. This indicates that many people are paying for products that are poor value. For instance:
- claims ratios from 2008 to 2012 for GAP add-on insurance averaged just 10%. In other words, nine-tenths (90%) of the price paid by policyholders was distributed in profits shared between insurers and their sales partners. So, we are conned into paying, say, £500 for a product worth little more than £50;
- similarly, the claims ratio for add-on personal accident insurance was less than 9% – making it even worse value than GAP cover.
In contrast, the payout ratio (claims paid divided by premiums collected) for front-line personal insurance sold to consumers, including motor and household insurance, was nearly two-thirds (64%).
In short, these add-on policies are a right royal rip-off!
What happens next?
To address these market issues, the FCA is proposing a number of remedies.
- In the days following the sale of the primary product, requiring sellers of GAP insurance to ask customers who bought it as an add-on to confirm that they really do want it.
- Banning pre-ticked boxes, to ensure that people actively choose to buy an add-on and are clear when and how they are purchasing it.
- Requiring firms to publish claims ratios to highlight low-value products, putting pressure on providers to deliver better value to their customers.
- Improving the way that add-ons are offered through price comparison websites, including how and when they are introduced.
If you're interesting in contributing to this market review, the FCA is asking for comments on this report and proposals by 8th April 2014. You can read the FCA's full market report here.
This market study into general insurance add-on products is the first of its kind by the FCA. However, in future, similar studies will be the basis of how the regulator gathers evidence to assess competition problems, before it can intervene to promote better outcomes.
Billions in compensation coming?
The FCA's findings echo what we have been saying on lovemoney.com for years: these add-on insurance policies are overpriced, aggressively mis-sold and riddled with get-out clauses.
Given the size and scope of this market review, it seems highly likely that people who have been mis-sold general insurance add-ons in the past will find it easier to seek compensation. In 2012, the total premiums for the five products directly investigated in this FCA market study were £2.5 billion, of which £500 million were sold as add-ons. Therefore, compensation and fines for past mis-selling in this latest financial scandal could run to billions of pounds.
In summary, if you've ever been sold a poor-value add-on insurance policy (alongside your home or motor insurance, a credit card or bank account, or a holiday, car, mobile phone or gadget), then you may be in line for a future cash payout, plus interest. Watch this space...