Add-ons continue journey into the unknown

It’s now almost three years since the FCA called for evidence about add-on mis-selling. Several banks and credit card companies plus certain insurance intermediaries were singled out for criticism; fi nes and refunds followed. Then the whole general insurance market found that add-ons were under scrutiny.

Of five key products* in their study, GAP (guaranteed asset protection) can no longer have its purchase concluded at the point of sale and pre-ticked boxes (opt-out) are banned on all. ARAG remains very much in favour of this latter action whilst reserving judgement on some issues – where  we have no role – and actively opposing the initial ‘sunlight’ proposal to identify a core measure of value through publication of claims ratios.We take the view that including legal expenses and assistance products as an integral policy feature  makes more sense at this time than ever before. The alternative opt-in method of sales risks individuals missing out on vital insurance protection. It also adds to the complication of determining the correct point in the sales process to introduce the question of policy enhancements.

Go to paragraphs 2.16 and 2.17 in FCA Policy Statement 15/22 and it’s in black and white; because there is no optionality in what is called an unbreakable bundle, “the ban on opt-out selling will not apply”. However, if there is a menu of covers for the customer to select, the ban on opt-out selling does indeed apply. (www.fca.org.uk/your-fca/documents/ps-15-22-general-insurance-add-ons-expectations-case-studies)

To assist consumers to make value-judgments when buying insurance and taking on board industry responses, the FCA has been persuaded to take forward a scorecard approach to include claims frequencies, claims acceptance rates and average claims payouts, potentially with the inclusion of an average premium metric as their preferred option. The scorecard data is intended to be a market transparency remedy, rather than point-of-sale disclosure to consumers.

While claims ratios may be suitable as a value-measure for some general insurance products, for legal expenses policies high claims costs do not necessarily refl ect good consumer outcomes because cases where cost recovery is achieved return low or zero claims ratios and an excellent outcome for policyholders. Focusing on claims ratios (or any other ratio) risks deterring customers from selecting the most suitable product to meet their demands and needs or from seeking wider information on products.

The FCA announced a pilot starting this Summer covering a small number of products over two one year periods with the objective of obtaining further evidence of the eff ectiveness of the scorecard remedy. The FCA say they will continue to engage with stakeholders on the pilot design ahead of its launch. With such diverse proposals, consultations, bans, new ‘best practice’ and so on, we have produced a series of advice notes and background information that is available from our account managers.

A further FCA focus is on renewal pricing disclosure. The inference here is that new customers may be treated more advantageously than loyal ones; existing policyholders may be encouraged to shop around if they know how much the premium has increased since last year. The FCA  will require that loyal customers of more than four years are prompted by a message advising them to shop around. The FCA has trialled such measures in behavioural research that has been published.