High commission rates on general insurance policies threaten to cause another misselling scandal
Another month, another FCA report that rocked me back on my heels. The catchily titled General Insurance Distribution Chain – Thematic Review got the press coverage its name deserves: almost none. But, as so often happens with FCA reports, there are facts buried within it that are eye-opening – if not watering.
The report covers a very limited area of general insurance: cover which is sold as part of a retail sale rather than the big GI categories like insuring your house or car.
It includes ancillary insurance sold by your car dealer and travel insurance bundled in with a short trip. Outside this report but also included is damage or technical help insurance sold with, for example, a mobile phone. Carphone Warehouse was recently fined £29m for misselling that.
Now to those eye-watering facts. Take what is called guaranteed asset protection insurance. That is supposed to step in when your new car is written off or stolen within a year or two, but your regular car insurance will only give you the much lower value of the vehicle at the time the theft or write-off occurs. So dealers offer GAP cover for that, ahem, gap in your cover.
Now we know why they are so keen to do so. Say you pay £360. Out of that the insurer gets £81, a distributor gets a £6 mark-up and the car dealership gets £213 commission. That comes to £300 and the chancellor adds £60 insurance premium tax. So out of your £360 premium, 59.2 per cent goes to the dealer. Strip out the tax and it is 71 per cent.
Similar calculations are done for something called scratch and dent cover – yes, it was new to me and when I enquired, the Association of British Insurers had not heard of it either. Nearly 60 per cent of what you pay is commission.
If you book a five-day coach trip around the UK, the figures in the FCA’s report indicate that you will be sold insurance for £20 which actually costs £4.42, with 61 per cent of the total price retained by the coach operator. It gets worse. Not only is this insurance sold at vastly inflated prices, it may not even work.
The FCA found that travel insurance was sold without health enquiries to customers who are “potentially not eligible to claim”. GAP insurance was sometimes sold for second-hand vehicles on which there was no “gap” to cover.
At this point, you might realise where the problem lies – apart, of course, from greed and indifference to customers. It is the big distance between the insurer and the retail sale. Products are being sold “via elongated distribution chains where there has been insufficient consideration of some of the distributors and the range of customers they are potentially selling to”. Hence the report’s rather dull title. In other words, the insurers sold the policy, then lost interest in what was actually done with it.
The FCA says that is contrary to the Insurance Distribution Directive (thank you, EU!), which keeps the responsibility with the insurer.
Hold that in mind. We’ll come back to it after another acronym. Payment protection insurance, or PPI, is the biggest financial misselling scandal (so far), for which more than £34bn has been paid in redress to millions of customers. It was sold at vastly inflated prices, regardless of whether the buyer could ever claim. The Plevin case in the Supreme Court revealed that Ms Plevin had been sold PPI where commission was 72 per cent of the sale. The FCA revealed that the average PPI commission was 67 per cent.
It deemed that sales with commissions above 50 per cent were unfair unless the buyer was aware of them. Cue more PPI claims, followed by the FCA ruling that claims for all PPI compensation have to be in by 29 August this year. Somehow, it contrived to say this was in the best interests of customers.
So is misselling of insurance with cars and retail products the next PPI misselling scandal? In some ways, clearly not. The scale is tiny compared with PPI. GAP insurance premiums, for example, are only £70m a year. PPI compensation is costing that much every week. But with commission above the FCA’s level of 50 per cent and no indication that any customer was ever told how much of their premium was going that way, it is open to anyone who was missold these long-value-chain GI products to claim redress.
What, though, of solving these problems? Even ABI boss Huw Evans described them to me as “unacceptable rip-offs”.
One suggestion I made to FCA head of retail supervision Jonathan Davidson was that he should ban commission for insurance sales, as was done for investments and pensions. His reply was: “At this point, we haven’t considered this as a remedy and there are broader issues about how insurance is priced and the role commission plays in it which we’re looking at.”
He promised market studies. Meanwhile, the FCA says it is up to insurers to check their products are sold properly at the end of the value chain, especially since the IDD came into force last October. But hang on, says the ABI, who regulates these people selling insurance? The FCA.
Why doesn’t it take away their right to sell it? The FCA claims that many retail sales are exempt. Almost none of them are, retorts the ABI.
I won’t bore you with my whole email exchange on this topic. But while these behemoths argue, customers will continue to be missold poor-value, overpriced and inappropriate insurance to the profit of everyone except the consumer.
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s Money Box programme. You can follow him on Twitter @paullewismoney