Overview FCA Study of General Insurance add-on products

1    Call for evidence

Perhaps driven by the atrocious mis-selling of add-on insurances by CPP and Swinton insurance between April 2010 – 12, (press clipping available), the FCA announced in December that it was going to commence a market study of General Insurance add-on products. 

In July 2013 the FCA called for evidence to be submitted by September 10th 2013 http://www.fca.org.uk/static/documents/general-insurance-add-on-market-study.pdf

The study focused on five products where the FCA considered that consumers will be aware of standalone alternatives (travel) and products where they may not.
•    guaranteed asset protection insurance (GAP insurance),
•     home emergency,
•     gadget,
•     travel and
•    personal accident.

The FCA asked:
- Q1 Is competition in the sale of GI add-on working well for consumers?
- Q2 Where you consider competition is not effective, why do you think that is?
ARAG submitted a response – a redacted copy of which is available.

2    Market study of GI Add-ons Provisional Findings

The FCA published their provisional findings document in March 2014 and hosted an industry event to outline the findings which was attended by ARAG. 

- Here is a link to the provisional findings document:
http://www.fca.org.uk/static/documents/market-studies/ms14-01.pdf
- Here is a link to a press report from Insurance Times:
http://www.insurancetimes.co.uk/Story.aspx?storyCode=1407460&source=Adestra

The FCA found that the add-on mechanism has a clear impact on consumer behaviour and affects the way they make decisions. They established that Add-on buyers are less likely to shop around, less effective when they do shop around, and less sensitive to price and that these features of behaviour could be exploited by sellers.
The FCA used the claims ratio (the proportion of the premiums consumers pay that is paid out in claims) as their core measure of value.

The provisional findings resulted in four "remedies" with the FCA announcing their intention to:

1. Impose a deferred opt-in on add-on sales of Guaranteed Asset Protection (GAP) by mandating that the sale cannot be concluded at the point of sale of the car or car finance but only at a later point, and that the consumer must be given information about alternatives if the product is offered at the point of sale at all.
2. Ban pre-ticked boxes (so-called ‘opt-outs’) for the sale of add-ons because of the negative impact they have on consumer behaviour and consumer outcomes.
3. Require firms to publish claims ratios – to shine a light on low-value products and increase pressure on firms to improve product value.
4. Improve the way add-ons are offered through price comparison websites, focusing in particular on what information consumers can access about add-ons and when this is introduced.

A copy of the FCA slide show is available and here is a link: FCA GI Add Ons Slides March 14

Firms were given only four weeks to provide feedback on the provisional findings and proposed remedies. The FCA asked :
•    Do you agree with the conclusions we have drawn from our analysis?
•    Are there any reasons why our provisional findings should not become final?
•    Are our proposed remedies likely to be effective in addressing the issues we have found?
•    Are there any other remedies we should consider?

 ARAG submitted a comprehensive a detailed response.
Although we :
•    were unable to comment on GAP insurance
•    were supportive of the ban of opt-out sales (and already practised this following the earlier publication of the Motor LEI Thematic Review), and
•    agreed with the importance of clear information being available to customers buying products on price comparison websites:
•    we expressed strong reservations about the validity of publishing claims ratios and identified difficulties in arriving at a workable way of doing this. We outlined why this measure would fail to deliver the FCA's own objectives and the risk of consumer detriment that could result from customers being nudged away from the most suitable product to meet their demands & needs or being deterred altogether from buying some products.

3    Occasional paper No3.

In April 2014 the FCA published an occasional paper detailing consumer behaviour experiments that they had commissioned the LSE to conduct.

The FCA concluded that experimental findings uncovered material ways in which different elements of buying insurance as an add-on can contribute to poor consumer outcomes.
Here is a link : http://www.fca.org.uk/news/occasional-paper-no-3

4    Market study of GI Add-ons Final Report

In July 2014 The FCA published their final report. In our view this largely ignored 65 responses that were submitted in response to the provisional report. 

Here is a link to the final report and a copy is available: http://www.fca.org.uk/news/market-studies/general-insurance-add-ons-market-study 

The final report did not provide information about the FCA’s remedy work which continues to be ongoing but focused on the feedback received.

•    Overall the FCA concluded that the feedback had not changed their overall conclusion that competition for add-ons is not effective.
•    The FCA reiterated that they recognised the value that some add-ons can provide (including the convenience they offer to consumers) and…
•    …that there were differences between the five products in the study and between different general insurance products more widely.
•    The FCA expressed intent to apply cross-market remedies only where findings suggested that markets may be affected more widely.
•    The FCA stated that they recognised 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.
The FCA referred to setting up working parties to take forward discussions in the best way to implement the four remedies they had committed to. 
ARAG wrote in July 2014 expressing a desire to be involved in the work on developing the claims ratio remedy.

5    ARAG Paper Working Party considerations – "The Sunlight Remedy"

    By January despite further exchange of e-mail with the FCA team we had heard nothing further about the working groups.

We produced a paper detailing the points we felt should be considered in relation to implementing the claims ratio (Sunlight) remedy and a copy of this is available.
In response the FCA advised that although a final decision on the scope of the remedy had not been made it was likely that LEI would fall outside of its scope.
No advice was given regarding assistance products such as Home Emergency and we infer that such product will be included in the remedy.

6    CP14/29 GAP insurance

Consultation opened in Dec 2014 and closed in March 2015. ARAG did not respond. 

Here is a link : http://fca.org.uk/news/cp14-29-guaranteed-asset-protection-insurance

7    CP 15-13 Add-on remedies

Here is a link to : http://www.fca.org.uk/news/cp15-13-gi-add-ons-proposed-remedies which was published in March 2015 with a closing date of June 2015. This focuses on :
•    banning opt-out selling, and
•    improving product information provision in relation to general insurance add-ons

A copy of ARAG's response is available.  While largely agreeing to the implementation of both remedies we felt that the FCA's cost benefit analysis relied on assumptions and assertions that were fragile and did not stand up to detailed scrutiny. We considered the findings unbalanced, and we were not confident that the figures had been based on sufficient data.

The FCA responded to our concerns however was unwilling to share their data or provide any further information to assuage our concerns.

8    ARAG position statement opt-out sales

In response to confusion in the market that led to us receiving a number of enquiries regarding the Opt-out ban we produced a position paper in May 2015. 

9    GAP Insurance policy statement and rules

In June 2015 the FCA published their policy statement and rules in relation to GAP insurance   http://www.fca.org.uk/news/ps15-13-guaranteed-asset-protection-insurance-competition-remedy

10    DP15-04 Developing General Insurance Add-ons Market Study – Remedies: Value Measures

Also in June 2015 the FCA published a discussion paper with a closing date of 24 September. 

The discussion paper sought views on twelve questions: http://www.fca.org.uk/news/dp15-04-general-insurance-add-ons.

In our response (copy available) ARAG acknowledged that publication of claims-ratios is a potentially powerful measure that could have a profound impact on some products but it risks being used by consumers as an alternative to engaging more fully with the products.

We did not consider it appropriate to apply a claims ratio as a measure of value for general insurance products and certainly not LEI products and we urged the FCA to reconsider the scope of this remedy. 

11    PS15/22: Add-Ons Market Study –
Remedies: banning opt-out selling across financial services and supporting informed decision-making for add-on buyers, including feedback on CP15/13 and final rules and guidance.

At the end of September 2015 the FCA finalised their ban on opt-out selling and both Handbook and non-Handbook guidance to improve the information that is provided early on in the sales journey.  The policy statement set out an overview of the consultation feedback and their response on:

•    FCA rules banning opt-out selling
•    FCA Handbook guidance

Effective date of rules – April 2016.
http://www.fca.org.uk/news/ps15-22-general-insurance-add-ons-market-study-remedies
In paragraph 1.23 the FCA promised a consultation paper on the Value measures by the end of the year. At the time or writing this has yet to be published.

Section 4 of the document concerns "unbreakable bundles". Where insurances are sold as an unbreakable bundle – with no opportunity for the customer to choose whether or not to purchase cover it will not be caught by the ban.

12    CP15/41: Increasing transparency and engagement at renewal in general insurance markets

December 2015 closes 4 March 2016.
http://www.fca.org.uk/static/fca/documents/consultation-papers/cp15-41.pdf

13    FS16/1: Feedback Statement on DP15/4 – General insurance value measures

On 1^st March 2016 the FCA published a feedback statement which summarised the responses they had received to the options set out in Discussion Paper DP15/4 (See 10 above). 

Although the FCA had originally proposed using claims ratios to measure customer value they were persuaded by respondents to DP15/4 to take forward a scorecard to include claims frequencies, claims acceptance rates and average claims payouts, potentially with the inclusion of an average premium metric as their preferred option.
They reiterated the intention to publish scorecard data as a market transparency remedy, rather than point-of-sale disclosure to consumers.

The FCA announced a pilot starting in the Summer of 2016 covering a small number of products over two one year periods with the objective of obtaining further evidence of the effectiveness and costs of the remedy. The FCA said they will continue to engage with stakeholders on the pilot design ahead of its launch. Here is a link : http://www.fca.org.uk/your-fca/documents/feedback-statements/fs16-01