driving change: motor legal expenses insurance A high level summary and findings from the FCA s thematic review into the Motor Legal Expenses Insurance market august 2013
Introduction The FCA conducted their Thematic Review on Motor Legal Expenses Insurance 1 (MLEI) to gauge whether it provides good consumer outcomes. Products were evaluated on the basis of value, customer understanding of the product and firms sales processes. The report demonstrates the FCA s approach to supervision in the general insurance market. Using a combination of firm investigation and customer research, the FCA expect to develop a holistic picture of whether a market, such as MLEI, is working well. Their rules and follow-up actions for firms, along with guidance and solutions from TCC contained within this white paper should ensure firms are able to remain compliant and profitable, whilst providing consumers with an industry in which they trust. Consumer research carried out during this review indicated that although consumers have a high awareness of MLEI, they often do not understand it. This was further corroborated by the investigation of firms business practices, which found that not enough clear, understandable and quality information is provided to the consumer. Background MLEI is most commonly sold with the sale of a motor insurance policy and is designed to protect the consumer against legal costs associated with an accident caused by an uninsured driver. The cover, although differing between provider, generally contains recovering losses from the at-fault driver and legal representation for criminal offences relating to the accident. This Thematic Review will be used as part of the regulator s General Insurance Add-on study, announced in December 2012, along with the Mobile Phone Insurance 2 review. The regulator is taking a dim view of any firms that do not provide good outcomes for consumers and will be appraising this throughout firms business model, strategy and culture. The regulatory action taken against two large insurance firms which transpired from these reviews are evidence of the FCA s hard-lined approach. Firms should take this as a warning to get their houses in order. The FCA will return to undertake further investigation (in 2014) to ensure their rules have been observed. 1 http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr13-1 2 http://www.fca.org.uk/your-fca/documents/thematic-reviews/tr13-2-mobile-phone-insurance Share this 2
Findings This review was undertaken in order to ascertain whether the product was considered valuable to consumers, whether firms were adequately explaining the product and if it was being sold in a way that allowed the consumer to make a well-informed, independent decision. Many firms were found to be conducting business in a way that satisfied the regulator, yet some firms practices were found to be potentially detrimental to the consumer. Does MLEI provide good value to consumers? Firms The FCA has indicated, as highlighted by other product reviews, that firms which gain little profitability from the product are less likely to provide successful outcomes to claiming consumers. It appears that MLEI can be a lucrative product despite the low cost to the consumer, due to referral fees. Consumer Through evidence obtained through customer research, the regulator deemed that MLEI is a product that can be useful to consumers as it provides access to justice, which may not be attainable through other legal means. Although the product is considered to be valuable to consumers, the FCA found inconsistencies between the cover provided by firms in their policies. Firms should therefore judge whether the scope of their product is in the interests of the consumer i.e. is it providing the cover that a consumer would expect? Does the way in which MLEI is sold provide good outcomes to consumers? MLEI is provided in three ways: Included as part of the motor policy (24% of survey responders) Sold as an opt-out add-on (58% of survey responders) Sold as an opt-in add-on (18% of survey responders) Although largely the product is sold through the consumer opting-out, the FCA found that consumers often do not have the confidence to disregard the instruction of the firm and de-select MLEI. In the case of online purchasing, this is often also compounded by potentially scaremongering pop-up messages that attempt to persuade the consumer not to opt-out. In addition, some firms bundle add-ons together, sometimes labelling them essential, increasing the alarmist tone and probability for confusion. The regulator therefore concluded that opt-out selling is not consistent with good consumer outcomes. They also stated that firms which provide MLEI included within the motor policy must ensure that they are explaining clearly what is covered within the product. The FCA also investigated whether firms incentive practices resulted in a hard selling culture. They found that the majority of firms practices were adequate, with the exception of one firm, who are now under regulatory action 3. 3 http://www.fca.org.uk/news/firms/swinton-group-fine-mis-selling-add-on-insurance-policies 3
In light of the above findings, firms should ensure that they: Make sure consumers can understand the product enough to make an informed choice whether to purchase it or not; Are achieving the right balance between customer interests and commercial objectives; Have a compliant incentive and remuneration policy in place that does not lead to a culture of hardselling; Consider the implications of remaining with an optout process, from both a regulatory and customer care perspective; and Do not bundle products in the way identified above ( further details can be found in the review document). The FCA deems this practice to be a breach of the rules. How well was the product explained to consumers? Sales Practices From listening to a range of recorded and live sales calls, the FCA identified that: There was a variable quality between calls in terms of the explanation of what the policy covered some clear, others vague and hurried. Customers took little time to think and reason whether buying the policy was best for them. Website Content The FCA looked at the description and explanation of the product on firms websites and comparison sites 4. The regulator found the explanations invariably did not make it clear: what was and wasn t covered and who it would cover; where the losses would be recovered from; and what were the crucial elements of the cover - these were not brought to the customers attention soon enough or given enough prominence. Policy Wordings In an analysis of policy documents, the FCA found them to be of a variable standard. In many cases they typically found: The wording was difficult to understand to the average consumer, either through length or use of legal jargon; The most important elements of the cover, exclusions or terms were not given enough prominence; and Who and what was covered was unclear. In order to ensure that the product is explained clearly and appropriately to consumers, firms should take measures to ensure: Information is provided within a structure hierarchy, which is easily accessible for consumers that want or need to read more to better understand the product; That the information provided is quality rather than quantity to ensure maximum engagement with the consumer; and 4 Price comparison websites are currently under scrutiny from the regulator as their increased consumer usage has changed the way in which the insurance industry operates. The FCA, in their Business Plan states: We will review the risks that price comparison websites present to consumers and whether they comply with regulatory requirements Share this 4
At each stage of the sales journey, and through each sales portal (i.e. sales call or online) the explanation is clear and concise. Firms must ensure they are not using potentially vague or misleading terms and phrases. Firms that do not heed the above advice should expect further regulatory intervention. If firms products, sales practices or policies are not in line with the FCA s suggestions, then firms must be prepared to undertake a review to provide evidence that their practices still result in good consumer outcomes, particularly if their approach does not conform within the general industry. Summary of what to do next Firms providing Motor Legal Expenses Insurance (MLEI) must review their propositions and ensure that they offer customers information that is clear and appropriate. TCC urge companies to amend messaging that could be construed as misleading. It is also often difficult for consumers to fully understand MLEI - which should provide protection to consumers with regard to the legal costs incurred following a motor accident that was the fault of someone, or something, else - due to its complexity. Often sold as an insurance add-on, and typically towards the end of a lengthy process devoted to the core motor policy, whilst it appears that consumers have a high level of awareness of MLEI, they generally do not understand it. This means that insurers need to separate MLEI from the core product and work on making it clearer for consumers to understand the features and benefits. Whilst it is accepted that the insurance industry strives to improve the products and services designed for consumers, it is clear that the FCA s recommendations to improve the clarity of the wording of some MLEI policies comes as a useful reminder that the industry still has some way to go yet. Finally, rather than being pre-selected by motor policy contomers, MLEI is often sold on an opt-out basis, which means it is the firm, rather than the consumer, that has added the policy. 5
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