FCA 'game changer' set to discipline add-on markets

08 April 2014

The FCA has published its third Occasional Paper describing the new experimental approach it took in its add-ons market study, where for the first time it used behavioural economics to assess how selling insurance as an add-on affects consumer decisions. This raises key implications for insurers.

Indeed, as Martin Wheatley, the FCA's Chief Executive, pointed out in a recent speech, "... for the FCA ... behavioural economics is quickly becoming a game changer.  Not just for consumers, but potentially for the shape of regulation for many years to come ... And firms in the UK at least, should be under no illusions as to how serious we are about breaking [the] link between poor products and high financial reward."

The experiment

The FCA first used an experiment to examine customer behaviour in its add-ons market study.  A principal objective of this study was to investigate whether transactions where insurance is offered as an add-on to another primary insurance product intrinsically have effects on consumer behaviour that translate across different insurance markets and whether these effects are anti-competitive.

Alongside economists and academics, the FCA designed a controlled experiment that made it possible to test directly for common patterns of customer behaviour arising from the structure of the add-on insurance purchase and to identify which of these aspects were the most crucial in driving these effects.

Participants were asked to shop around for a main product (for example, a holiday, car hire, a boiler, a laptop or an iPad) and they were then given the opportunity to buy related add-on insurance products.

The add-on insurance was offered both at different points in the purchase of the main product and on different terms, with some priced annually, others monthly.  One group was instructed to purchase insurance alone; the other to purchase both the main product and the optional add-on insurance.

The results

The results of the experiment are surprising.  Where standalone insurance was being purchased and a single price given, there were virtually no mistakes in choosing the best deal.

However, when participants had to choose between prices for the main product and then separate prices for the add-on insurance, one in five failed to identify the cheapest option.  In addition, when monthly prices were presented to the participants instead of the annual cost, there was even more confusion, with consumers paying higher prices and shopping around less.

The FCA also found that keeping track of multiple prices without a total was a major barrier to consumers being able to compare insurance firms' offers effectively.  This suggests that consumers could need help in comparing options even when add-on prices are given up-front.


The results of the FCA's behavioural experiment show that simple changes to the presentation of material can have drastic effects on the ability of consumers to identify the best priced packages for their needs, with the add-on mechanism being seen to "weaken consumers' ability to discipline firms by shopping around and comparing products effectively".

In light of these results, the FCA has proposed a number of remedies to the harms identified in its add-ons market study, including banning pre-ticked boxes in an attempt to combat customer inertia, as well as an overhaul of the way add-ons are sold through price
comparison websites.  As I explained in a previous blog, the FCA is currently consulting on these proposed remedies, with comments due in by 8 April 2014.

Martin Wheatley has described these proposals as "a quantum leap forward in the competition debate. For the first time, [the FCA is] seriously considering how [it] can
support consumers to discipline markets more effectively...  If consumers are consistently harmed by a product, firm or market, it makes sense that a ban or enforcement may be the best option."

The FCA's proposals will not be finalised until consultation with the industry is complete, but clearly the FCA is serious about changing the add-ons market and expects insurers to be proactive in bringing about that change.

Furthermore, according to Martin Wheatley, "it is clear that behavioural economics – as part of the regulatory toolkit - could become profoundly important...  Competition will be king as [the FCA] move[s] forward."