Should MGAs view the case against N Brown as a signal that storm clouds are ahead for “add-on” products?
By associate member Duncan Minty.
How likely is it that the mis-selling of a General Insurance “add-on” reported by fashion retailer N Brown is a one-off? Probably not, although at £35-£40m the anticipated scale of the cost which it faces may not often be repeated.
The lesson for MGAs is that the FCA will be expecting underwriters to take on board that there needs to be a connect, for the consumer, between price and value. Of course some lines will be more volatile than others, but let’s be honest, it’s not usually a problem in the “add-on” market. The FCA is one regulator that generally shies away from price regulation. But what it could be saying here is that too much profit is an ethical issue when it creates ‘group detriment’.
In other words, the price/value differential per policy may be small, but the cumulative effect is significant. This is not news: it was the same message the regulator sent out in 2012 with identify theft insurance.
So the lessons are: exercise control over your product and communicate your expectations.
One concern is that oversight, at the MGA underwriter, should have been tracking this problem and asking questions. A sharp regulator will be looking for the reasons why this didn’t happen, using tools such as influence mapping.
This may seem intrusive but let’s put it into perspective. Every insurer in the US is price regulated on a pre-approved, state by state basis. And rate increases have to pass a near universal test of US insurance law: “rates shall not be …excessive…”.
Is this a possibility in the UK?
When the FCA appears to be in a political corner, as seemed to be the case with the short term credit market, then it is prepared to introduce price and cover regulation. If the “add-on” market is to avoid such a storm, then clearly new schemes need to be shaped with fairness and value in mind from the heads of agreement onwards, and established schemes scrutinised for unethical legacies. These should be joint exercises, involving all parties to the value chain.
These are issues that fit within the wider framework of marketing ethics. Last year, the CII published a guidance document on the ethics of insurance marketing and you can download it here.