Posted: 2nd August 2013

Dark regulatory clouds have been gathering over insurance add-ons and general insurance (GI) products of limited value. The lessons of the thematic review, however, do not stop with general insurers and should be applied industry wide. The Chief Ombudsman’s, Natalie Ceeney, warning remarks are being followed up with action: “we’re concerned that we’re now seeing more going wrong in insurance than we were a few years ago. And that when things are going wrong, they are not being put right sufficiently quickly or sufficiently well.” The £2.8 million fine of insurance intermediary PAS puts action on this front in the spotlight.

Motor legal expenses insurance (MLEI) insures customers against legal costs that may be incurred in relation to an accident in which they were not at fault. It allows for uninsured losses to be recovered from an at-fault driver and provides legal representation for a driver under prosecution for motoring-related criminal offences.

The MLEI thematic review found that customers knew they held the product but that they did not understand it. Furthermore, it was sold as an add-on towards the end of a lengthy process for a core motor policy on an “opt out” basis.

Preselecting products may seem benign, but the FCA’s first occasional paper on behavioural economics presents a different view:

“Behavioural economics suggests that at least some consumers will not have the confidence to override the ‘authority’ of the firms and de-select the cover”.

Given the occasional paper is core reading for all FCA supervisors, firms should be prepared to account for – and evidence – such considerations when designing sales processes and monitoring customer outcomes. This is applicable across retail firms and products.

To secure good outcomes for customers firms should at minimum review:

Financial incentives: are there risks in your incentive schemes that could lead to poor customer outcomes? Is your monitoring of those risks included within your monitoring plan?

Sales process: is the sales process enabling customer understanding and good outcomes? Is your firm requiring customers to opt out of cover?
Disclosure: what is the quality of explanation or disclosure at all stages of the customer journey?
Value of the product: what is the extent of cover provided versus price?

Noises from the regulator in relation to insurance are getting louder. One of the key messages in the FCA’s 2013 business plan is that firms fail to design products that meet customers’ needs. This must be seen together with ongoing concerns in relation to the selling of insurance and the treatment post sale for example effective complaint and claims handling or dual pricing. For those operating in the insurance market, expect regulatory attention over the next 12 to 18 months.

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