From April 1, the Financial Conduct Authority (FCA) implemented new rules banning opt-out selling and restricting the way insurance add-ons can be sold.
The move was on the back of a study by the FCA which showed that selling insurance products as add-ons often leads to customers purchasing products that were either of poor value or not of the type the client really needed. The new rules will change the way brokers work, and they are advised to brush up on the upcoming rule changes to serve their clients better.
For brokers to help customers make informed decisions when purchasing add-ons, says Sara Ager, legal director for commercial and governance at specialist law firm EC3 Legal, brokers should:
- introduce add-on covers to the customer early on in the sales process
- ensure that the customer actively elects to purchase and/or to renew any add-on cover
- ensure that when information is collected from the customer on the proposal form, it expressly asks them to confirm what cover they require and makes no assumptions
- review their sales process to ensure it permits the customer to make informed decisions
- review policy information packs to ensure that they expressly address and provide full information on add-on covers
- clearly display add-ons so that the customer knows what they are agreeing to buy and the cost
- review rating structures to ensure that add-ons and optional extras are all separately rated/priced
- state and confirm each individual cover purchased as a separate and stand-alone cover, and be able to demonstrate the rating and a price for each
Ager said that if an add-on is being renewed, documentation issued to the insured must provide information about the differences in cover unless the cover is substantially the same and the original policy was purchased before 31 March 2016. “Merely asking a customer if they want accidental damage cover whilst compiling a statement of needs does not mean they want to buy it,” she said.
In terms of what brokers should not do, Ager advises:
- Don’t rely on information taken from the customer when collating a statement as an indication of their wish to purchase the add-on cover
- Don’t assume question sets on price comparison sites and/or the quote and bind systems provide the customer with choice and a right to elect the cover to purchase – question sets are designed to identify a need and packages produced are offered around this created need
- Don’t use pre-ticked box selection
- Don’t assume because a premium amount is allocated to an add-on cover that this is sufficient for the customer to make an informed decision
- Don’t fail to rate add-on covers separately
- Don’t give add-on covers for “free”
- Don’t assume because an add-on has a nominal cost/value that the customer will want it
- Don’t hide the cost of an add-on cover within the rating of the main policy
Ager was also very clear to point out that this guidance does not relate purely to retail customers but commercial clients as well.
A spokesman at RSA added that the only time an opt-out feature can be included in a policy is if it’s genuinely free both at the start of a policy and at renewal. “If the feature will incur a charge upon renewal, consumers must opt-in,” he said. Also, products in ‘unbreakable bundles’, or those which cannot be purchased separately, must also be sold on an opt-in basis.
In order to help brokers understand the new rules, the FCA has released a series of case studies, clarifying the sale of add-ons. One is as follows:
In July 2016, firm B writes to a customer proposing to renew their buildings and contents insurance policy (which was first taken out in July 2015). The renewal includes a number of optional additional products. Firm B is unsure of whether or not the customer previously opted in to purchase these products, or made an informed decision to buy them. Firm B sends the customer the necessary renewal documentation, along with a ‘Notice to Policyholder’. The Notice informs the customer that the renewal of the optional additional products is optional, that the customer may elect not to renew them and that, if they do decide to cancel these products, the buildings and contents policy itself will be unaffected.
According to the FCA, the new rules require firms to get active confirmation (an active election) from their customer to renew optional additional products. However, where these products were originally purchased on or before 31 March 2016, and they are automatically renewed on substantially the same terms, the firm has another option.
The firm can instead choose to take reasonable steps to inform the customer that the renewal of the product is optional and that the customer can decide not to renew the product. The customer must also be told of the effect of any non-renewal. In this example, Firm B has sent a Notice to its customer to inform them of the required information. The firm should consider whether this constitutes ‘reasonable steps to ensure that the customer is informed’.
“For example, is the customer used to receiving information about their policy in this way?, the FCA said. “We want to ensure that customers are able to engage with this process.”