The FCA’s recently voiced concerns about long insurance distribution chains generated attention grabbing headlines such as FCA “REPORT BOMBSHELL: Regulator set to pounce on insurance firms for mistreating customers”.
In its opening gambit the FCA report raised concerns over approaches that can lead to customers “inappropriate products, paying excessive prices or receiving poor service", an angle that has been readily lapped up by the media.
However, as with all reports, the devil is in the detail and the FCA’s main concern is really quite specific. It is focused on the high commissions and inappropriate sales of insurance products at the end of long distribution chains — such as by motor traders, travel firms, phone shops and white goods retailers. The research was focused on the distribution of travel, tradesman and GAP/motor ancillary products and the results extrapolated to all general insurance products. Lost in all the media noise was the fact that the FCA stated quite clearly that there are many other insurance distribution chains and products delivering good value insurance products and appropriate outcomes, with no evidence of harm.
The FCA’s concern is that insurers — and brokers — do not take enough care over what happens to their products when they aren’t directly involved in the sale, from the price they are sold at after a trail of commissions and charges have been added, to the relevance of the product to the customer. The regulator makes the point that it is insurers that must bear the ultimate responsibility for how and to whom their products are sold — and it wants them to do more. It wants insurers to address failures in product design (though it cites most products are of value if sold to the right people), weak oversight of the distribution chain, poorly designed distribution strategies and conflicts of interest caused by firms’ remuneration structures.
And there clearly is a problem. In GAP it saw commissions of over 60% by motor manufacturers or dealership networks; over half of scratch and dent insurance premiums being retained by distributors and a similar scenario in some travel insurance products, as well as for furniture and white goods warranty products. It is this easy money for the end distributors that is in all likelihood driving the sale of these insurance products to customers who may not need the cover or may find a better deal for the same cover elsewhere.
Tackling this area of the market is not however a simple task and it raises a number of issues over customer choice and access to product.
Clamping down on commissions is a tough nut to crack. In many cases the end distributors own the customer relationship. When it entails the purchase of a car or a phone the tail is very much wagging the dog in terms of commission charged and it’s the phone shop or car dealership that profits from such high margins. Perhaps one way forward, though hard to apply in practice, would be to adopt the use of recommended retail prices as used on many consumer goods — such as tomato ketchup — designed to stop profiteering by unscrupulous corner shops. By reducing profiteering, miss-selling will also reduce.
Keep the shop open
But there is also a wider issue of helping customers to access insurance and of letting them choose to pay extra for the convenience of buying insurance at the same time as the purchase they want to protect.
Our research indicates that the majority of people are well aware of the potential additional costs of buying insurance via the likes of holiday providers and phone retailers.
Our Viewsbank poll of 1,050 consumers shows that only 15% have bought insurance from the same company that sold them their car, only 22% bought phone insurance from the phone shop that they bought their phone from and 32% bought travel insurance from the company they booked their holiday with. They did this with their eyes wide open and with the majority of customers citing convenience for their decision.
And of course there is the issue that if such products are not available at that time of purchase they may not buy any cover at all — driving up more underinsurance. In essence, would the same individuals who bought phone insurance with their new iPhones have gone home, investigated and bought phone insurance if it wasn’t offered to them in the shop? Or would some have been left without cover for an expensive gadget they could ill afford to replace if it was lost, damaged or stolen?
Have you ever bought phone insurance from the same company you bought your phone from?
Viewsbank survey of 1053 adults. Online poll conducted 18-20 April 2019
Did you shop around for your phone insurance before buying it from the company you bought your phone from?
Reasons for buying insurance from phone vendor after shopping around
Reasons for not shopping around amongst those who purchased insurance with phone
Most customers know that convenience can come at a price. And many are happy to pay that price. The challenge is to get that balance right and reduce the overall loading of commissions by those in the chain.
Not all innovative routes to market are bad. They can address underinsurance and create a deserved profit for those who are brave enough to design them. The last thing we need is for insurers and brokers to walk away from partnerships that give consumers new opportunities to share their risks and protect their purchases.
If you told grocery suppliers to police the margins that retailers sold their products for, we would end up with empty shelves in many independent and local shops.
Whilst insurance providers and brokers can and should do more to ensure the end distributor is not miss-selling its products; draconian action by the FCA could have adverse consequence for consumer choice and protection.
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