Topic: Financial services
Who: Financial Services Authority
When: Theme for 2013
Law stated as at: February 2013
In December 2012 the FSA began a study into the sale of general insurance products as “add-ons” to other, often larger purchases such as cars, electronic equipment or holidays. The aim of the study is to identify areas in which competition is being weakened by add-on insurance causing consumer detriment. The FSA is also considering
the conduct of firms selling low value insurance, which raises similar concerns to the sale of add-on insurance.
The FSA considers that insurance firms are creating products that customers do not need and offer no real benefits. Full results of the FSA’s study are expected in Q3 2013 and redress/ enforcement action is expected to be specified soon after (which potentially could comprise a consultation on new rules to be adopted).
One of the catalysts for the FSA’s study was its investigation of Card Protection Plan. On 14 November 2012 the FSA published its final notice issued to Card Protection Plan Limited (“CPP”), fining it £15.2m for mis-selling card protection and identity protection insurance.
The FSA found that CPP’s sales process promoted an excessive focus on sales. As a result of the FSA’s findings CPP was also forced to carry out a past business review overseen by a skilled person (at a
cost of £8.5m), change its governance structure and senior management team, stop writing or renewing new retail business and undertake a redress exercise to affected customers (at an estimated cost of £6.1m).
CPP’s employees were encouraged to be overly persistent in persuading customers to purchase products even where they had been initially declined and aggressively setting targets for reducing the number of customers cancelling their insurance policies.
CPP had also emphasised to certain customers that they would benefit from up to £100,000 worth of insurance cover in respect of identity theft when the risk was already covered by the consumer’s bank pursuant to statutory obligations. CPP failed to take action to address concerns voiced by the FSA in a timely manner, resulting in failings over a period of 6 years, during which over 23 million policies were sold.
In its Retail Conduct Risk Outlook, the FSA’s initial findings were that there were concerns at every stage from the product design through to mis-selling and then poor claims handling and limited success at the pay-out stage. The following areas have been identified as areas
of emerging risk by the FSA and will be assessed in more detail in the FSA’s study of the add-on insurance market:
(i) Weak competition at the point of sale
Because only one insurance package is sometimes available to consumers through salesmen selling a principal product, consumers have reduced negotiation power and feel they need to take or leave the package being offered.
(ii) Pressurised sales culture
Low value insurance products tend to have high profit margins which firms will use to supplement their income received through more mainstream insurance policies. This has resulted in a pressurised sales culture, rewarding persistence and introducing targets for staff to reduce cancellations of policies. Notably, in relation to CPP, pressurised selling only stopped once the staff sales script was changed, which then resulted in a dramatic drop in sales.
(iii) Excessive levels of cover
Consumers are drawn to an insurance product due to the high level of risk covered but where in practice an insurance firm has not paid out anywhere near this level of claim. This may include providing cover of up to £100,000 to entice consumers to sign up to the insurance cover where in fact claims paid out by the firm would not usually exceed £5,000.
(iii) Hidden charges
Insurers placing a primary focus on the initial premiums often build hidden charges into their policies, such as high excesses, which are unnoticed by customers. Also common is an initial discounted period followed by an increase in premium, often coupled with automatic renewals and unexpected cancellation charges.
(iv) Policies offering little value to consumers
While the cost of the insurance policy may be low, it may often include little benefit for consumers, who are unlikely to need the cover provided or are unable to claim on it. In the CPP case, if consumers had been aware of their rights, many would not have required cover for identity theft, as banks are required to have systems in place with which to block and insure stolen credit cards.
The FSA has highlighted the need for insurers to ensure that their products are being designed and marketed appropriately and with consumer needs in mind.
(v) Bundling packages made up of different products cause confusion for customers
The FSA is of the view that the optional nature of add-on insurance is all too frequently not highlighted by sellers of add-on insurance.
Sales staff often mislead consumers at the point of sale into thinking that the product automatically comes with the insurance. Consumers tend to focus on the primary sale and fail to properly consider the overall cost or benefit of the insurance to them. Further, firms often incentivise staff to sell the insurance without explaining the terms of the cover properly.
Why this matters:
The FSA has sent a clear message to industry that it can expect similar volumes of claims for add-on and low value insurance that was experienced in the payment protection insurance market.
This means it is important for firms to be able to demonstrate that insurance products provide a benefit to customers and to immediately stop the sale of insurance that may fall within scope of the review.
Waiting for the results of the FSA’s study rather than pre-empting them will result in significant costs to firms operating in the sector, as it is clear the FSA will take action and that action will be comprehensive and entirely focussed on the well-being of consumers.