Great Britain's Financial Conduct Authority recently published the results from their survey of consumers of add-on insurance products. The FCA has regulatory authority over most kinds of insurance products. For this study, the
FCA looked at travel, "gadget," personal accident, guaranteed asset protection ("GAP"), and home emergency insurance. They wanted to see if there was evidence of competition. To do that, they decided to compare the experience (price, understanding, choice) of consumers when they purchased an item in connection with the purchase of a good versus when they purchased the item on a stand-alone basis.
1) Buyers do not shop around; only 58 percent said that they considered another policy. Thirty-eight percent never considered a policy at all prior to arriving at the store.
2) People become more amenable to buying add-on insurance once they have associated the protection with a specific good. They are more willing to buy insurance once they have picked out that television or settled on a choice of a trip to the Bahamas. In the FCA's survey, only 17 percent of customers decided to buy an add-on when they were presented with the price prior to shopping for their merchandise. On the contrary, when they were pitched to buy an add-on after they had picked something out, 65 percent opted to take out the policy. This is the "point-of-sale advantage."
3) Consumers forget. After three months, almost seven in ten add-on policy holders could not accurately state the cost of their premium. Almost one in five forgot that they had a policy in the first place. More than half forgot what benefits were accorded by the policy. Their level of understanding was roughly equivalent across the two purchasing channels. This behavior could explain why loss ratios are so low.
5) Most consumers who purchase add-on products did not report that they did so under pressure. When they did, the FCA found that their feelings toward the company and salesperson carried over to their sense of the value of the add-on product. While disclosures could influence consumer decision-making, the advice of a trusted salesperson was a more powerful factor in their thinking.
6) Among the five product types, personal accident insurance was the most profitable. Products sold as add-ons were generally more profitable than those sold on a stand-alone basis. The point-of-sale advantage is lost. As well, stand-alone sales must overcome customer acquisition costs.