Posted: 19th May 2014

Here we look at the provisional findings of the FCA’s first ever market study into general insurance add-on products (insurance products sold on the back of a primary product) initially launched by the FSA in 2012.

The study is interesting and highlights key aspects of the new regulatory regime, specifically behavioural characteristics that play a key role in understanding why, even with good quality and accurate information, consumers can still make poor financial decisions and advisers can still give unsuitable advice.

Within the insurance add-on markets five insurance products were targeted: travel, gadget, home emergency, personal accident (PA) and guaranteed asset protection (GAP). The findings and remedial actions, whilst relating specifically to these five products, will apply to all add-on products.


The headline finding was that the FCA found that competition in the add-ons market place is not effective. There is a risk of poor consumer outcomes and that consumers are paying significantly more than they need to. The regulator goes into further detail highlighting the following as key issues:

  • Timing: selling customers an add-on as they purchase a new car increases conduct risk; the add-on can seem relatively cheap compared to the car price meaning consumers may buy something they do not require
  • Add-on coverage: coverage details are unclear
  • Product comparison: it is difficult for consumers to compare a standalone add-on product with the same cover packaged up in the cost of the primary product
  • Weak consumer engagement: this provides firms with an incentive to sell products that might not meet consumers’ needs and charge high mark ups or both
  • GAP: this was criticised most heavily out of the five products examined. The FCA commented that sales can be “particularly persuasive” with GAP sometimes being presented as “a way of securing a discount (on the car)”
  • Claims ratio: this is a key indicator for the FCA to assess. GAP and PA were the worst offenders at 9% and 10% respectively i.e. out of every £1 paid for a PA policy only 10p went to pay claims and the rest to profit and expenses
  • Net prices: the price the underwriter charges to the add-on distributor was on average only 23% of the total price to the consumer. However, the distributor would retain 77% of the premium and so earn a considerable profit margin. This mirrors the situation with PPI, where it was largely the distributors, often the banks, rather than the insurance underwriters, who made the profits on that product
  • The “Waterbed effect”: the FCA did consider the argument that by charging inflated add-on prices the distributors could reduce the price of the primary product. However, the FCA was concerned about the distortions to the market caused by such cross subsidies. Those customers who did buy an add-on would be subsidising the cost of the primary product for those who did not. The resulting opaqueness of pricing overall would weaken the effectiveness of competition in the market

Actions and remedies

The FCA urges all firms to review their design, distribution and sales processes for add-on products. There should also be a wider consideration of whether a firm’s business model and processes are achieving the right outcomes for add-on customers.

The FCA have signposted a number of proposed changes. As the FCA takes steps to finalise its market study, firms should consider the preliminary findings to assess the potential impact new rules will have on its business and the options available.

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