The insurance market is causing consumers all sorts of difficulties. Here’s what needs to happen
Rocio Concha, Director of Policy and Advocacy
| Which?
Car insurance premiums have been enough to drive motorists round the bend recently. While the worst of price rises may have now passed, it’s little comfort for drivers who have had to shell out hundreds of pounds more for cover than they would have done just a few years ago.
To make matters worse, many people who can’t afford to pay for cover all in one go are penalised with hefty monthly interest rates. These rates, which our September mystery shop found in the most extreme cases can reach the dizzying heights of over 40 per cent APR, increase the overall yearly cost. And which drivers are more likely to be stung by this situation? Those on lower and less secure incomes, who choose to spread the cost in monthly instalments not out of choice, but financial necessity.
At Which?, we’ve consistently raised the alarm about this issue - premium finance, as it’s known in the insurance industry. We believe that interest rates charged by car and home insurers are in many cases far too high. Average APRs from our September provider survey of 22 per cent for car insurance and 20 per cent for home insurance are broadly comparable to APRs charged by credit card lenders, despite, as the FCA has pointed out, the risk to insurers being lower because they can terminate policies if customers miss payments.
If this were the only issue in the insurance sector, we might put it down to a quirk of the market. But as our investigations over the past year have shown, it’s far from it. Insurance customers are all too often being let down by some firms - from the moment they buy insurance, right to the point where they may need to make a claim.
Let’s start with taking out the policy in the first instance.
Insurance is unlike many other products because people buy it in the hope they’ll never have to use it. That has considerable consequences for the mindset customers have when they make a purchase. Typically, consumers will use price comparison websites to analyse policies - and often firms will provide at least three policy options. For convenience, let’s name them gold, silver and bronze.
We are unlikely to traipse through the terms and conditions for any product or service we buy, not just insurance. But, faced with the choice of gold, silver and bronze, we tend to take certain mental shortcuts. Gold is probably too expensive and too comprehensive for what we need, while bronze doesn’t seem adequate enough, its low price off-putting in itself. That typically leaves the silver policy - not too expensive but not too threadbare.
If only it were that simple. Our research has found that decisions made at the point of taking out a policy can have serious repercussions later down the line should customers need to make a claim. A lot of that has to do with customers’ expectations of what they might be covered for and the reality of what they are actually protected from.
Take cover for missed flight connections. Among our recent survey respondents, it’s a commonly held belief that travel insurance will provide cover should you miss a connecting flight. After all, it’s beyond passengers’ control. Yet in many cases it isn’t covered, meaning holidaymakers could be left high and dry.
If most consumers expect coverage for something which in most instances isn’t, this can’t just be put down to customer ignorance. This isn’t to argue that consumers are absolved of responsibility for the products and services they buy, either. But the regulator is clear that consumers can only take responsibility for their actions when they can trust that the products and services they can choose from are designed to meet their needs and they are supported by firms with the right information to make decisions.
Regulatory requirements also oblige firms to address poor outcomes for customers. This includes considering the reasonable expectations of their intended customers when designing products and supporting customer understanding when they sell products.
Which? believes the regulator must ensure that firms are meeting their obligations under the Consumer Duty, a set of rules on firms’ behaviour towards customers. The regulator should take enforcement action against firms where necessary.
Encouragingly, the regulator has already launched work into premium finance. As part of that market study, it must get to the bottom of what fair rates of interest are by gathering information from firms on profit margins and commission levels - and ultimately be prepared to take tough action against firms continuing to charge excessively high rates of interest on monthly repayments.
The FCA should also address the high claims rejection rates consumers are experiencing with home and travel insurance.
This review should lead to action against firms that have not sufficiently addressed persistent issues that are driving high claims rejection rates. This could include not meeting existing requirements to sell products to meet customer needs and the reasonable expectations of their target market, and not supporting customer understanding of key terms and exclusions.
The FCA has the power and responsibility to step in and protect consumers. The regulator must show its teeth and start taking tough enforcement action against insurers that are failing to meet their Consumer Duty obligations, to comply with FCA insurance rules or wider consumer law.
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