global insurance management

Policy Add-ons and Extras

Oct 01 2012

Policy Add-ons and Extras

Relevance:                   All firms.

Action required:           Review the sale of ‘add-on’ products before the FSA make you.

In August last year we indicated that the FSA had got its eye on the sale of ‘Optional’ Extras and had re-issued a specific factsheet covering this area. As a follow-up step, the FSA has included Add-ons as one of the “emerging risks” it has identified.

Remember, the FSA is looking to make sure that consumers are treated fairly and it has spotted problems with

  • Products of limited value - The FSA has raised concerns about firms designing insurance products which are of limited use to consumers. Any product with very low loss ratio could attract attention in this respect. These tend to be sold along side another product or service, often by non insurance businesses (e.g. utility providers).
  • Add-ons - Some firms generate significant profit from the sale add-ons and there is a concern here about the real cost of the policy compared to the premium paid by the client (e.g. with a £25 Legal Expenses policy, which actually cost the broker £1, it is unlikely that the customer realises that he is paying for a product with 96% commission).

Additionally, we are now seeing Legal Expenses facilities provided to brokers at no cost. In this case, what may be described as a premium is actually a fee and should be described as such.

The FSA has warned the industry that it will take action against firm’s that fail to look after consumers properly so you need to consider whether what you sell represents fair value and whether your processes are transparent. For example, we would strongly recommend that you consider charging an administration fee and providing Legal Expenses at something like what it actually costs. We are very aware that firms may already charge fees which could make this difficult but we think you need to act on this issue

We are already seeing claims management companies turning their attention from PPI to sales of another protection product, GAP (Guaranteed Asset Protection); once more looking to generate complaints of mis-advice and bad sales practice.  GAP insurance has the potential to come under FSA scrutiny as it tends to have a low loss ratio and a very high (undisclosed) dealer mark up.   

Given the small amounts of money involved, it is unlikely that Legal Expenses will attract the claims farmer’s attention. However, you need to think about the impact of the FSA demanding that you review completed sales (and provide appropriately reimbursement) if they decide that clients have not been treated fairly or sales not completed in a transparent way.

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