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Regulator to Force Shake up of Profitable Insurance Add-On Market

Posted on by Editor

The City regulator is to force a major shake-up of the £4bn insurance add-on market, creating greater competition in what it perceives to be a “closed shop” sector.

The Financial Conduct Authority will tell insurers that the sale of “add-on” products in areas such as travel, mobile phones and home emergency provision is uncompetitive and not operating in the best interests of consumers.

In a major announcement expected as early as Tuesday, the new regulator will issue a series of new rules aimed at ensuring the highly profitable market becomes competitive and reduces prices. It marks the completion of its first competition review.

Insurance providers and the companies who work with them to sell the products, such as retailers and travel agents, will be forced to be more upfront about the way policies are explained to consumers.

The regulator will also impose new rules surrounding the wording of marketing materials for add-ons, to ensure consumers are not misled, and to ensure that customers are aware such policies are optional.

Add-ons are insurance products sold alongside primary products, and range from replacement insurance sold when buying a new phone to travel insurance sold by a holiday company.

It is understood the announcement would be made before the stock market opens, reflecting the market sensitive nature of its content. Shares in motor insurers, such as Direct Line, eSure and Admiral, and home emergency insurers, such as Homeserve, could be hit by the regulator’s findings.

Some motor insurers are believed to generate approximately a third of profits from add-ons.

The regulator’s review into the sale of add-on products began last July. The launch came in the same month the FCA fined Swinton, one of the UK’s biggest insurance brokers, which was accused of making an extra £92m from selling products, including personal accident cover and motor breakdown policies, to existing customers. In addition to a £7.4m fine, Swinton was told to pay more than £11m to affected customers.

The review involved widespread industry discussion as well as behavioural research, consumer research and questionnaires to companies involved in selling of add-ons. The research specifically focused on whether consumers were aware of third-party alternatives, and why, if at all, they felt pressured to buy the insurance at the same time as the primary purchase.

Unveiling the review last July, Mr Wheatley said: “People are being made to feel they have to have these products when they don’t really need them.

“Our concern is that the products are generally poor value, and, by and large, people don’t pay too much attention to the terms and conditions. We are saying there could be anti-competitive behaviour.”

The review focused on five key areas of the market: guaranteed asset protection insurance; home emergency; gadgets; travel; and personal accident.

It is the first such piece of work to be undertaken using the competition remit the FCA was given at its inception in April 2013.

Its predecessor, the Financial Services Authority, previously had to wait for problems to arise before it could take action.

The FCA hopes to enforce the proposals from mid-May after consultation with the industry, a quicker timetable than for previous consultations, and is believed to reflect the preceived scale of the problem.

Spokesmen for the FCA and the Association of British Insurers declined to comment.

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