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Paul Lewis: Insurers can’t let distributors rip off customers

Paul-Lewis-greyHigh 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

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. Yawn. I’ve read all that already a week or so ago, and I yawned then.

    Taxation is a rip off too. We could do with sorting out what that is spent/wasted on rather than frothing at the gills about relative trivia. Nice to have but not really a priotity in the big scheme of things. Levying the licence fee is hard to justify these days, unless you cannot stand listening to climate change being rammed down your throat on every programme whether it’s Teletubbies (massive sun) or Pingu (lots of cold).

    But I suppose that won’t put bread on the table of the freelancer.

  2. My post looks like an angry rant. It wasn’t entirely supposed to be a personal attack. The point I was trying to make may have been too buried.

    The point is that some things are far more trivial in importance than others and in fact this is where we are spending far too much regulatory time. It’s easy kicking the regulated, and this is a classic example of the triumph of activity over results. This is amongst the least of our problems. I was quoted a ridiculous cost of an additional insurance on a hire car for an additional risk. I walked away. You can do that. We also all know the tricks they play. Those insured excess hire car premiums are always issued “at the desk” so that you are in a bad negotiating position to start with and nearly always cave in to a high price because where else do you go when you need to get to that meeting in an hour?

    A little anecdote (I won’t reveal the actual market to which this applied, but the principal is important). A market in a certain financial product sprung up in the latter half of last century, well within the ambit of the current style of regulation. Commission was paid on each transaction effected. Providers all agreed to operate a cap. Although nearly every agent took the maximum, they were free to reduce the commission and rebate it back. The regulator reviewed the market and did not like the cap. They said it was price fixing, they said that it was anti-competitive and they said downward pressure would come from commission disclosure. Did it? For the good IFAs who disclosed commissions and felt that they could justify the normal rate as it was the “normal rate”, they went with the cap. The guys who hid the commission disclosure, well, they would take 2, 3, 4 or even 5 times the normal amount.

    Here we are, 25 years later, and still there is no disclosure. Surely the regulator should be enforcing its rules that it had years ago? Or at least, surely, they should be make sure they apply to general insurances.

  3. “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.”

    And the sad thing is the regulator knows and is prevaricating, just like it always has.

    The FSA knew about the level of commissions on PPI on the day it was formed in 2001. The FCA knew about the issues with unregulated investments and execution only SIPPs. The FCA knows about the issues with DB transfers now. It is just easier and politically safer to look like they are doing something (reviews, guidance, more rules, Dear CEO letters, etc.) than actually taking affirmative and effective action to protect consumers.

    The regulatory mantra could be summed up as “say the right thing, do as little as you can get away with, allow the problem to develop, demonise and blame the industry, fall back on the FOS and FSCS for the consumer”. Job done, bonuses paid.

  4. Firstly, I have no involvement in this market and therefore no agenda. I’m also not condoning this type of cover (GAP insurance purely demonstrates you’re overpaying for the car!)

    There’s often an issue when there’s a cost which, when %aged, looks eye watering.

    In absolute terms – is £213 of cost to arrange an insurance policy (which is what commission is paying for) excessive? I don’t know but it doesn’t’ feel it given we’re dealing with an asset worth many many £000s. Also, what value peace of mind?

    What the premium is as part of that consideration is, in my view, irrelevant. If the consumer wants it and there’s a cost in arranging it, so be it.

    My issue is that this should all be disclosed. If it’s disclosed, there is no issue and it’s up to the client to decide.

  5. Gavin Fielding 5th May 2019 at 12:42 am

    There is always an assumption that commission is wrong and that fees are better. What is wrong is the large amounts being received. Banning commission may mean this type of insurance is no longer sold (or misold) at retail outlets, but also means consumers being subject to uninsured loss. In the retail investment market we banned commission in favour of advice fees, but in the general insurance market there is no facility to offer fee based advice to the retail consumer. The FCA could price cap commission at percentage or £ level.

    • “…in the general insurance market there is no facility to offer fee based advice to the retail consumer. The FCA could price cap commission at percentage or £ level.”

      Surely it wouldn’t be difficult to charge fees if the need arose, I can’t see this business being abandoned because nobody could come up with a way…

      And the price cap argument has already been run with investments and apparently it breaks competition rules. Can’t see this being any different.

      • Gavin Fielding 8th May 2019 at 5:19 pm

        It is commission if it is contingent on a product sale, commission can be a £ amount or percentage. In the general insurance market there is nobody there giving fee based insurance advice that may not result in a product. Price caps did do in commission caps, shame look at all the problems and regulation since then, greater good and all that.

      • Gavin Fielding 8th May 2019 at 5:21 pm

        It is commission if it is contingent on a product sale, commission can be a £ amount or percentage. In the general insurance market there is nobody there giving fee based insurance advice that may not result in a product. Commission caps were done in by anti-competition rules. Shame look at all the problems and regulation since then, greater good and all that.

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