Friday, 25 July 2014

Our thoughts on FCA final report into add-on insurance products

·         To recap – the FCA’s provisional findings to its Market Study of add-on insurance were published in March.  The FCA concluded that competition in add-on markets is not effective and that markets were not broadly working for consumers, with add-ons products offering poor value for money.
·         The Provisional findings provoked 65 responses from the insurance industry and consumers which focused mainly on the proposed remedies.

What did respondents say?
  • Some respondents felt the “waterbed” effect where core premiums are reduced when add-ons are purchased should be considered in more depth.
  • Generally respondents considered that the FCA had failed to take into account differences between products in forming their conclusions and that remedies assumed “one size fits all”.
  • The FCA’s Proposal to ban opt out selling and to improve the way in which add-ons  are sold on price comparison websites received broad support – which is echoed by ARAG.
  • Feedback opposed FCA analysis of firm data centred on the use of value as an indicator of whether markets were competitive i.e. the “Sun light" remedy which proposes publishing the claims ratio.
  • Respondents felt for a number of reasons that the claim ratio was not a good indicator of value or profitability. They challenged the detail of the FCA’s calculations and identified practical difficulties associated with implementation of this remedy; although the remedy was supported by one consumer group.
  • Respondents challenged the FCA’s conclusions about GAP insurance and focused on the negative effect the deferred opt-in method of sale proposed by the FCA might have on the GAP market.

Key messages from The FCA

The final report does not provide information about the FCA’s remedy work which is ongoing but focuses on the feedback received.
·         Overall the FCA has concluded that the feedback has not changed their overall conclusion that competition for add-ons is not effective.
·         The FCA reiterates that they recognise the value that some add-ons can provide (including the convenience they offer to consumers) and…
·         …that there are differences between the five products in the study and between different general insurance products more widely.
·         The FCA will apply cross-market remedies only where findings suggest that markets may
       be affected more widely.
·         The FCA recognises that remedies must be proportionate, and wider market impacts and unintended consequences must be considered in determining the design of measures to be implemented.
·         The feedback received on remedies made clear that there are no easy solutions to the problems the FCA is seeking to address. In particular the FCA acknowledges that with regard to the Sunlight remedy there are several complex issues to address before such a measure can be introduced.

Next steps

The FCA will
  • work closely with industry and other stakeholders, including through a series of working groups which will be launched shortly,
  • consult on proposed remedies later in the year. The timetable reflects the complexity of the issues at stake and the FCA’s desire to take on board the feedback received.

ARAG’s position

·         ARAG has no experience of GAP insurance and cannot comment on proposals to remedy defects the FCA has identified in the GAP insurance market.
  •       We support a ban on selling add-ons by requiring customers to opt out of the purchase when they buy a core insurance product.
  •       Our particular interest is in the “Sun light” remedy. We look forward to playing an active part in supporting the FCA to implement this remedy  so that it provides meaningful information to consumers and does not have unintended consequences.

We are concerned that unless the remedy can be refined consumers;
·         will be misled about the actual value of products since the FCA admits that no such measure currently  exists
·         will lose the convenience and protection of add-on insurance,
·         could be nudged towards expensive stand alone products (which will escape the requirement to disclose claims ratios ) and
·         will find that in the future added value features such as telephone legal advice and free digital legal documents, which are currently included within legal expenses policies but not reflected in the claims ratio, will be withdrawn.   

Lesley Attu
Product Development Manager

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