FCA confirms market study into general insurance 'add-ons'

The nascent Financial Conduct Authority (FCA) confirmed on 9 July 2013 that it will undertake its first market study since becoming responsible for the promotion of competition in the financial services industry1.

This follows work commenced originally by the FSA back in December 2012, when it announced its intention to conduct a study into sales of 'general insurance add-on products'.

The FCA's market study will examine whether there is effective competition for 'general insurance add-on products', which are often sold on the back of 'primary products'. These 'primary products' may be financial services (such as home insurance) or non-financial products (such as motor vehicles, mobile phones or passenger flights).  The specific types of add-on being reviewed are guaranteed asset protection (GAP) insurance, home emergency, gadget, travel and personal accident and accident cash plans, which the FCA considers are representative of the market.

The FCA's findings in its recent thematic reviews of motor legal expenses insurance (an 'add-on' to a motor insurance policy) and mobile phone insurance will also be considered as part of the market study and as the FCA develops its approach to general insurance add-ons.

With this market study, the FCA is responding to concerns that consumers may not fully understand what the add-on insurance covers and will therefore focus on whether add-on sales limit how far consumers explore alternatives or base their decisions on relevant measures of price and quality.

To this end, the FCA has published its 'theories of harm', which postulate why consumers may be experiencing poor outcomes in relation to add-on products.  These theories consider whether:

• The nature of the add-on sale may inhibit a consumer's desire to shop around;
• The sale may be based on consumer concerns that have increased during the sale process (for example, if someone has just purchased a valuable item, they may feel the need to purchase cover immediately); and
• Consumers compare the price of an add-on product against the price of the primary product, rather than against the price of relevant alternatives.

In addition, the FCA will consider whether there are barriers to switching for consumers, and whether there are any unnecessary barriers preventing new providers from entering the market or smaller providers from expanding.

The FCA is not directly testing for mis-selling / misconduct by firms, but will focus instead on whether competition is ineffective and, if so, why.  This encompasses testing whether prices are excessive for a given quality of product and/or whether the quality is often not what consumers reasonably expect.

The FCA has asked for evidence from firms and consumers and expects to publish its findings by early 2014.  It has already received responses to questionnaires from underwriters and distributors, and is now in the process of assessing and analysing these.  It has also commissioned an initial round of consumer research, testing product awareness and 'shopping-around' behaviour. 

As explained in the FCA's 'call for evidence', interested parties have until 10 September 2013 to submit new information, or any further views and evidence.

¹On 1 April 2013 the FCA became responsible for the conduct supervision of all regulated financial firms and for the prudential supervision of those not supervised by the Prudential Regulation Authority.