FCA 'committed' to introducing means of measuring value of add-on insurance products

Christopher Woolard, the regulator's director of strategy and competition, said that the FCA was "committed" to introducing a measure of value for these products, and urged firms to comment on the proposals and to suggest alternatives, where relevant.

The FCA first proposed the introduction of a value measure after its market study into insurance 'add-on' products concluded that too many consumers were purchasing poor value, unnecessary products, particularly where these were pre-selected at the point of sale. It is seeking feedback on its proposals until 24 September 2015.

"We believe consumers in this market need to have greater transparency about what they are paying for," said Woolard. "We believe the options set out in the paper will boost competition between firms to offer the best deal for consumers."

The FCA has already proposed a ban on pre-ticked boxes and opt-out selling as a means of encouraging greater consumer choice and participation in the purchase process. Also, earlier this month, it published new rules to address particular issues specific to the motor vehicle guaranteed asset protection (GAP) insurance market that emerged during the same study.

The discussion paper sets out three potential measures for calculating the value of add-on insurance products, along with their respective advantages and disadvantages. It has suggested the use of the 'claims ratio', a figure which shows the proportion of premiums received paid out to settle claims, as a standalone value measure, as included in its original report on potential remedies. Alternatively it suggested the possibility of using a package of data comprising claims frequencies, claims acceptance rates and average claims pay-outs; or a combination of claims ratios and claims acceptance rates.

The FCA said that the claims ratio was a "useful indicator of value", as it gave consumers an indication of potential quality across a range of factors such as level of cover, probability of needing to make a claim, pay-out and claims handling processes relative to the price paid. However, it would not fully capture certain elements of value, and would not distinguish between which factors in particular were driving the value of a particular product, the FCA said.

These issues could be addressed by including an additional metric to provide "a broader picture of product value and quality", with the claims acceptance rate seen by the regulator as the most effective additional measure. High acceptance rates could indicate consumers' understanding of the level of cover provided by a particular product and a firm's claims handling approach, amongst other factors, it said. It was less keen on publishing a package of other metrics, as this risked providing too much information and causing confusion, it said.

"The FCA's consultation highlights the significant difficulties in selecting and defining value measures, and not just in relation to add-ons," said competition law expert Jenny Block of Pinsent Masons, the law firm behind Out-Law.com. "Nevertheless, it is difficult to argue with the proposition that it is important for making purchasing decisions, and comparing products, to reflect measures of quality in some way. It is helpful that the FCA recognises this complexity in its proposals."

"Context is also likely to be crucial in interpreting any data provided. It may be challenging to cater for this while still making such information accessible and understandable," she said.