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The FCA published their final report on their market study MS 14/1 on 24 July 2014. The market study had looked at the add-on insurance market including GAP insurance.

The Study’s Findings

The FCA concluded that the add-ons market lacked effective competition and highlighted the following:

  • The way add-on insurance is sold with a primary product has an impact on consumer behaviour. Consumers tend to be less price-sensitive and concentrate more on their main purchase.
  • Insufficient information available to consumers particularly in respect to quality and price of an add-on which hinders consumers is making an informed decision.
  • Firms providing add-ons at point of sale have a clear advantage.
  • Add-on insurance often gives poor value for money, although this may also be the case for stand-alone products too.
  • Consumers are paying too much for add-ons due to poor competition, although it is acknowledged that some of the overpayment maybe returned in cross-subsidies of primary products.

Market Study Responses

The FCA received 65 responses to their draft study. The responses have been summarised as the following:

  • Majority of respondents did not comment on the FCA’s conclusions about competition in the market.
  • Most feedback focused on the proposed remedies.
  • Some respondents felt that insufficient weight was given to peace of mind, convenience and brand trust played in consumer decisions. Also, that the FCA research did not sufficiently acknowledge this particularly as the FCA research showed consumers were generally happy with their add-on purchase. However, some respondents did acknowledge the findings that add-ons do impact consumer behaviour.
  • A number of respondents questioned whether the consumer research sample size was sufficient to allow for robust conclusions and to determine the correct remedies.
  • Industry respondents expressed concern about the use of claims ratios to determine competition as it was felt this was not a accurate indicator. It was viewed that the ratio insufficiently reflected costs of supplying the product.
  • Respondents commented that consideration needed to be taken in respect to primary products and any reduction in cost when considering if customers were overpaying for add-ons.
  • The majority of respondents focused on the GAP market. Respondents tended to agree that competition was not as effective as some markets. However, they also pointed out that the position had improved since the period when the FCA survey was carried out.
  • Concern was raised that a one size fits all approach for add-ons was being taken.
  • Responses to remedies were varied. Broad support for ban on opt-out selling and use of price comparison website.
  • Criticism of claims ratio proposals except from consumer group who supported it.
  • Impact on wider GAP market if a deferred opt-in was a remedy. Also concerns raised around how this would work in practice and whether it would deliver the FCA’s stated objectives.
  • Respondents commented on the need to be mindful of unintended consequences when designing remedies.
  • A number of alternative remedies were suggested.

The Study’s Conclusions

The FCA concluded that following the consultation the feedback from stakeholders does not challenge their overall conclusion that competition in the add-ons market is insufficient. They do not believe respondents sufficiently challenged any of the FCA’s methodology or present sufficient evidence that the conclusions were wrong. On the basis of this the FCA are making their provisional findings final:

  1. That the add-on mechanism has a clear impact on consumer behaviour and often affects consumers’ decision making and weakens engagement which in turn strengthens a structural point of sale advantage.
  2. That many consumers are getting poor value, not just from add-on products, but also from stand alone purchases and there is a lack of transparency and comparability about the value provided by general insurance products.

The FCA do make the following points:

  • They recognise the value and convenience to consumers that some add-ons provide. They recognise the difference between different add-on products and will only apply cross-market remedies where findings suggest there is a need.
  • Remedies will be developed against a set of clear objectives and will be proportional taking into consideration the wider market impacts and unintended consequences to addressing add-on market issues.
  • Issues raised by respondents about remedy design and delivery will be considered carefully.
  • For both PCW’s and opt-out bans feedback has highlighted the need to strike a balance between delivering better consumer outcomes and not giving negative consequences.
  • FCA remain committed to act on their conclusion that competition is ineffective in the GAP market. They are considering feedback on the FCA’s specific proposals as well as alternative suggestions made in the responses.
  • FCA want to develop more effective competition through improved transparency and price comparison. The claims ratio remains the FCA’s preferred measure but are considering alternatives.
  • The FCA acknowledge the complexity of the issue and the need to consult widely and take feedback on board. They have also stated they will do further research on the GAP market to help the design of remedies.


The FCA have noted their particular concern with the GAP market. They believe competition is ineffective and intervention is needed to address this.

Their key proposal is a ‘deferred opt-in’ to limit point of sale advantage. Also that consumers must be told at point of sale about shopping around and to increase transparency pricing information must be given.

Respondents to the market study expressed concern over their proposals, in particular that the deferred ‘opt-in’ was in effect a point of sale ban. Respondents believed that the increase cost of having an opt-in plus lower GAP sales would lead to dealers stopping sales of GAP. In addition, if dealers stopped providing GAP then customers would not be made aware of the existence of such products and could be left uninsured.

Concern was also raised around the inadequacy of general motor insurance to fund any ‘gap.’

More generally, respondents commented on the benefits to the consumer from the sales process in a dealership compared to stand alone sales. Also, the convenience to the consumer of being able to buy GAP insurance at the same time as a car.

Concern was further raised about how the ‘opt-in’ would work in practice, when the deferral period would start and for how long. A number of improvements to the ‘opt-in’ were proposed. These include starting the deferral at point of order rather than sale. Also, suggestions of both information and explanation at point of sale, disclosure of alternative options, commission disclosure and extended cooling off periods.

FCA Response

The FCA state that the proposed remedies including the deferred ‘opt-in’ is to promote effective competition in the GAP market. Intervention in the point of sale is a new method of addressing consumer detriment under the FCA’s competition mandate.

The FCA have also stated that they will do more work before consulting on how to address the problems they have found in the GAP market. They acknowledge the concerns from respondents about any negative impact of their remedies, including potential withdrawal of dealers from the market. They will look at incentives for distributors; impact on consumer demand and behaviour; and the impact on consumers of the loss of purchase convenience. They will also look at suggestions made by respondents and consider the remedies that were introduced to the extended warranty market.

Other Remedies

Banning default remedies – this has generally been supported by respondents although comments have been made that the FCA should be very careful in the design of the remedy to ensure no unintended consequences.

Price comparison websites – the remedy to improve price comparison websites for add-ons was generally supported. However, a few concerns were raised including whether introducing add-ons too early in the sales process could just confuse the consumer.

Similar concerns regarding add-ons and PCW’s were also raised recently with the CMA’s investigation into ‘private motor insurance.’ The FCA will therefore work closely with the CMA to develop remedies.

Publishingclaims ratios – FCA want to use the claims ratio as the major indicator of value for add-ons. However, most respondents were critical of this remedy citing whether it would actually be an accurate representation of product value or could be misunderstood by consumers and act as a disincentive to buy an insurance product. There were also a number of practical objections around data gathering and the claims ratio itself, as well as the issue of differing IPT rates between stand-alone providers and retailers.

FCA still wish to push forward this proposal but will use feedback on how to develop and design an appropriate measure. Alternatives to the claims ratio will be considered.

Next Steps

  • Series of working groups with stakeholders will be held shortly.
  • Consultation on proposed remedies before the end of the year.

NFDA’s Comment

The NFDA is concerned that even though significant comment and supporting evidence has been given in response to the FCA’s initial Market Study findings and proposed remedies that the FCA appear to on whole dismiss it. They acknowledge the concerns from respondents but have not generally made any change to their position on add-on insurance and in particular GAP. The do though acknowledge that any remedies need to be designed in a manner that will avoid causing damage to the market and that they will consult stakeholders in this process.

The NFDA will continue to lobby with the FCA and more widely with Government to ensure that any remedies that are put in place do not cause significant detriment to dealers. We are already in contact with the FCA to ensure we are involved with their proposed workshops.

Posted by Sue Robinson on 01/08/2014