FCA General Insurance add-ons market study – final report

Date: 04/08/2014

A series of calculations accompanied by a cup of coffee

On July 24th, the FCA published the final findings of their add-on study.

The FCA received 65 responses to the findings and proposed remedies that they published in March (DAS was one of the respondents). The majority of the feedback that the FCA received was regarding the remedies and not the findings of the study. Therefore, they have now concluded the ‘market study’ phase of the project and are continuing with the remedy design work.

We initially reported on the preliminary findings of the FCA add-ons study back in March. DAS Group Risk Manager Paul Eccleson also commented on the findings in the March edition of the Monitor.

Below is a brief summary of the final findings report regarding the feedback that the FCA received regarding their proposed remedies.

Claims Ratios

  • Most of the feedback expressed concerns that the claims ratio did not reflect all relevant costs and was not a good indicator of value or profitability. In addition, it might not be useful for customers to compare relative prices due to the differences in propositions.
  • However, publication of claims ratios received “strong support from a consumer group”.
  • Claims ratios remain the FCA’s preferred measure, as from a “consumer perspective it compares what is paid in against what is paid out in claims”. They also see this figure being used effectively by financial journalists and consumer groups.
  • The FCA will continue to consider whether IPT would be included in claims ratios, as this is a cost incurred by the customer (even though it doesn’t represent income for firms).
  • Respondents suggested a number of alternative ways in which value could be captured and published and the FCA will consider these – e.g. claims frequency (proportion of claims to policies sold), declined claims rates, average claims settlement times (average time between claim submission and claim settlement), or product cover comparisons.

Price Comparison Websites

  • The FCA acknowledged the difficulty in providing clear and appropriate product coverage information due to varying product coverage.

Gap Insurance – Point of Sale Deferral

  • There was some concern that this remedy could result in lower consumer awareness of the risks which are covered by GAP insurance, which could leave customers exposed and uninsured.
  • There is no indication at present that this remedy would be introduced across other products. However, the FCA stress that “this sort of point of sale intervention represents a new way of addressing detriment, as we consider how best to take action under our competition mandate”.
  • There were alternative solutions posed by firms, which included starting the deferral period at the point of vehicle order, rather than the point of vehicle delivery.

Opt-out Sales

  • Almost all firms support the banning of opt-outs (e.g. pre-ticked boxes).

Behavioural Economics

  • Customers do value peace of mind, convenience and brand trust. However, they significantly overestimate their understanding of product cover.
  • Non-monetary benefits (such as peace of mind) will inform the FCA’s proposed remedies.

Other Points of Note

  • The FCA recognises the value that some add-ons can provide (including the convenience they offer to consumers).
  • They will not look to implement a “one-size-fits-all” solution and will tailor their remedies as much as possible. They will be proportionate, will consider wider market impacts and unintended consequences, and will design remedies based on understanding customer behaviours and motivations. There are no easy solutions to fixing the issues identified and the FCA respects this.
  • Firms noted that they believe the FCA should do more to improve customer-facing documentation. The FCA are currently conducting a programme where they are looking for and encouraging “smart, effective disclosure”, the results of which will be published later in 2014.
  • A consumer group felt that add-ons, at renewal, was a particular concern.

As we have mentioned in previous editions of The Monitor, DAS are already carrying out a major programme of customer research, which will help us to improve our understanding of customers and how best to interact with them going forward. There will be further opportunities to engage with the FCA in detail on the proposed remedies, including a formal consultation later in the year. DAS fully intends to continue our dialogue with the FCA regarding the remedies.

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