Corporate regulatory bodies in Australia and the UK are looking closely at the market for general insurance add-ons, whereby customers pay for one product and then pay a small fee to have insurance added – whether that is travel insurance provided with a credit card or another form of protection
The UK’s Financial Conduct Authority (FCA) has released the findings of its market study into general insurance add-on products, which is the result of research launched by the organisation’s predecessor the Financial Services Authority in December 2012. The objective of the FCA’s study was to determine whether competition in the insurance add-ons market is effective or not, and if not, to understand why this might be so. The Authority analysed a range of information from insurers and intermediaries, including product literature and data relating to sales, pricing, profitability and claims. It selected five products – travel, gadget, personal accident, guaranteed asset protection (GAP) and home emergency insurance, and assessed them against a range of criteria to compare them with stand-alone sales of the same products.
The FCA report states: “Travel was included in particular because we wanted to understand the impact of the add-on mechanism in relation to a product where we thought the market might be working reasonably well. We chose travel because it is a product that has a significant range of stand-alone options, and because it is a product which consumers buy frequently and could be expected to be reasonably familiar with, both in terms of the product itself and where and how it can be purchased.”
The good news for travel insurers is that the FCA seems, in general, to be happy with the way travel insurance works as an add-on product, noting: “Our evidence suggests we should be much less concerned about travel insurance (which consumers buy frequently and are broadly familiar with) than the other products in our sample.” The report states: “Overall, buying insurance appears to be a less premeditated choice for add-on buyers, which also helps explain the lower levels of shopping around. In our survey, 38 per cent of add-on buyers said they had not thought about buying insurance before the day of their purchase, compared with just 15 per cent of stand-alone buyers. There are considerable differences in intention to purchase across products, with the proportion of add-on buyers who reported not having thought about buying the insurance until the day they bought it particularly high for GAP (59 per cent) and low for travel (13 per cent).”
the add-on channel is 'associated with a greater risk of consumers purchasing products that are not suitable for their needs, are unnecessary, or which they will not use'
Another finding underlined the issue of customers not reading their travel insurance policies and having expectations that differed from the reality of their cover. One study participant was quoted as saying: “I thought I was covered for £750 for my ski equipment, but now I’ve read the policy, you only get 90 per cent if it’s less than a year old – and if it’s over three years old you only get 30 per cent! Mine is 18 months old and cost £500, so I’d only get 50 per cent back. I’m surprised.” The FCA commented that such indications from consumers show that the add-on channel is ‘associated with a greater risk of consumers purchasing products that are not suitable for their needs, are unnecessary, or which they will not use’.
Looking at competition in the industry, the FCA reported: “With the exception of travel insurance, competition from stand-alone products does not appear to constrain the pricing and quality of add-on insurance. Only in the case of travel insurance do we observe a range of stand-alone options that appear to constrain the supply of add-ons.” A profitability analysis shows that ‘insurers did not generate high profits from the underwriting of the sampled products for both add-on and stand-alone sales, with the exception of personal accident’.
Looking at claims ratios for add-on insurance against stand-alone cover, the FCA noted: “The claims ratio results show that, with the exception of travel, the sampled products are poor value, especially when compared to core insurance products.” Statistics gathered by the FCA showed a weighted average claims ratio between 2008 and 2012 of 52 per cent for travel insurance add-on sales, and 42 per cent for stand-alone sales. A claims frequency comparison showed that between the same time period, travel insurance add-on policies had a three-per-cent claims frequency, while stand-alone cover had a four-per-cent claims frequency.
The FCA concluded that competition in the markets for general insurance add-ons is not effective, and that this can led to poor consumer outcomes, with customers potentially significantly overpaying when they buy products as add-ons. The FCA stated: “Our overall finding is that add-on distributors possess a point of sale advantage that leads to weak competition for each of the products, with the possible exception of travel insurance.” It added: “We believe that there is a clear case for us to intervene in respect of the supply of general insurance add-ons, and this report also outlines a number of proposed remedies.” The FCA has thus invited comments on its provisional findings and proposed remedies, which include: banning pre-ticked boxes for the sale of add-on insurance products; placing a requirement on firms to publish claims ratios, thereby shining a light on low-value products; and improving the way add-ons are offered through price comparison websites.
The British Insurance Brokers’ Association (BIBA) has called the FCA’s suggested remedies a sensible first step. “BIBA believes that the products within the review offer valuable cover and that the suggested remedies will go some way towards providing a more level playing field for professional insurance brokers and protecting customers,” said the organisation in a media statement.
David Sparkes, BIBA’s head of compliance and training, attended the workshop at the FCA on the investigation. He said of the move: “The suggested remedies seem sensible first thoughts towards improving customer protection.” However, BIBA has emphasised that the suggested remedies for price comparison websites will need to be taken forward with close consideration of the FCA’s thematic review into price comparison websites to ensure a consistent approach.
Alexander Barnes, director of the Insurance Industry Group at international accountancy firm Moore Stephens, also gave his reaction to the FCA’s crackdown on the sale of add-on products: “The FCA clearly believes the way insurance add-on products are sold is inappropriate, and it has proposed changes to address its concerns. However, these products are currently a key source of revenue for retail insurance brokers, who may be forced to increase their commissions to stay profitable. The knock-on effect could spell the end of ultra-competitive introductory premiums, and increase insurance costs for consumers.” He went on to point out: “Particularly in the first year of insurance, add-on products are a significant source of revenue for many retail insurance brokers. In some cases, the actual insurance product is not even the main source of profitability. Price competition has made firms bring prices down to unprofitable levels, so long as they can assure the add-on profits and the long-term relationship. If these brokers feel they will not be able to make the same profit under the FCA’s new rules, their choice will be to raise premiums or re-evaluate their market position entirely. This may lead to a different balance and management of insurance and add-on products.” He urged insurance brokers and companies to respond to the FCA’s proposals, which will have a dramatic impact on their businesses.
Meanwhile in Australia
Australia’s Securities and Exchange Commission (ASIC), meanwhile, has announced its intention to look at the practices of companies offering add-on insurance as it sees a high number of complaints from consumers about them. Peter Kell, deputy chairman of ASIC, told ABC News: “It’s often the case that consumers don’t have that sort of purchase in mind when they’re thinking about the main product they’re looking at and can sometimes be talked into it, or even end up in a situation where they don’t realise it’s been bundled into the cost of the product. They find out down the track that they’re paying additional money for something that they haven’t understood that they’ve ever been sold, [and] that’s especially the case when it’s been bundled in with a lot of other products.”
Kell further explained the problem, and why ASIC is being moved to investigate the market: “We also find products at the other end when people come to make a claim and suddenly find there are a whole lot of exclusions, [which] should have been explained to them very clearly up front – exclusions which probably meant the insurance wasn’t suitable for them in the first place.”
the FCA concluded that competition in the markets for general insurance add-ons is not effective
Considering sales practices and the types of insurance that are being sold, Kell said: “We’ll want to make sure that claims handling is being properly dealt with because we often find the claims denial rates for these sorts of policies are relatively high and we’ll be looking at what sort of information is provided to consumers and the features of the products.”
ASIC’s focus is often on disclosure, thus it conducts regular reviews of Product Disclosure Statements (PDS) for different types of insurance. The current PDS review is focused on complimentary travel insurance that is provided with credit cards. ASIC’s regulatory update states: “While these policies are group policies purchased by the credit card issuer, we may contact specific insurers where we identify areas where they may need to make changes. As it is not the prime reason for the product purchase, there is a risk that consumers may not pay much attention to the cover until they make a claim, at which time it may be too late to deal with limitations or exclusions.”